As the Federal Reserve and Bank of England prepare to raise interest rates, risks are rising in the financial system, says Ben Wright, group business editor at The (London) Telegraph.
"An unprecedented monetary experiment is coming to a staggered end, and no one knows the potential repercussions — a plague of frogs cannot be entirely ruled out,"
he writes.
While the Fed and BOE are on the path toward tightening, the European Central Bank and the Bank of Japan have intensified their easing campaigns.
"For the time being, the markets remain sanguine, and, who knows, maybe the markets are right.
But maybe it’s too quiet," Wright says.
The S&P 500 sits within 1 percent of its record high.
"The policy response to the last crisis often sows the seeds for the next. It is not hard to map out a sequence of events in which that proves to be the case again. If it were, a U.S. stock market crash might be the least of our problems," Wright warns.
It could start with a faster-than-expected increase in U.S. interest rates. That could send Treasurys reeling, and "if they fall, they take everything else with them," he explains.
Many economists expect the Fed to begin raising rates in September and to move in 25 basis point increments. The central bank has kept its federal funds target rate at a record low of zero to 0.25 percent since December 2008.
David Riley, head of credit strategy at Europe's BlueBay Asset Management, also is concerned that the Fed's tightening process could cause harm.
"The ultimate destination is unknown and could trigger destabilizing shifts in global capital flows and currencies,"
he writes in the Financial Times.
"In response, uncoordinated national policies and distorted financial markets could further fragment the international monetary system." A currency war already is raging around the world.
Like Wright, Riley sees potential trouble in global monetary policy differences.
It's possible that "the fault lines in the international monetary system will be exposed by the stark divergence in monetary policy between the U.S. and the rest of the world, reflected in the dramatic appreciation of the U.S. dollar," Riley states.
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