The beatings will continue until morale improves, the saying goes. That’s one interpretation of the European Central Bank’s somewhat convoluted rejig of its quantitative easing program this week.
By insisting he’s not tapering bond buying while simultaneously reducing the monthly purchases and extending the time frame, President Mario Draghi is sending a mixed message that likely reflects disagreements among his Governing Council members. Cutting the program to 60 billion euros ($64 billion) per month from 80 billion euros throws a bone to those who worry that it’s time to withdraw the monetary medicine; lengthening the timeline until the end of next year pacifies policy makers who fear the patient isn’t yet on the road to recovery.
But in financial markets, bond yields are effectively tightening monetary conditions on the central bank’s behalf, suggesting investors are beginning to anticipate an improved economic outlook. That could play out in two ways: Either bonds are correct, and the ECB will find itself tapering properly next year, or bonds are wrong, in which case Draghi will have to make good on his pledge to do more if needed.