“We’ve never have had QE like this before, we’ve never had unwinding like this before,” Dimon said at a conference in Paris Tuesday. “Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before.”
Central banks led by the U.S. Federal Reserve are preparing to reverse massive asset purchases made after the financial crisis as their economies recover and interest rates rise. The Fed alone has seen its bond portfolio swell to $4.5 trillion, an amount its want to reduce without roiling longer-term interest rates. Minutes of the Fed’s June 13-14 meeting indicate policy makers want to begin the balance-sheet process this year.
“When that happens of size or substance, it could be a little more disruptive than people think,” Dimon said. “We act like we know exactly how it’s going to happen and we don’t.”
Cumulatively, the Fed, the European Central Bank and the Bank of Japan bulked up their balance sheets to almost $14 trillion. The unwind of such a large amount of assets has the potential to influence a slew of markets, from stocks and bonds to currencies and even real estate.
Central banks would like to provide certainty but “you cannot make things certain that are uncertain,” Dimon said. All the main buyers of sovereign debt over the last 10 years — financial institutions, central banks, foreign exchange managers — will become net sellers now, Dimon said.
“That is a very different world you have to operate in, that’s a big change in the tide,” he said. “The tide is going out.”
— Read Bill Gross: Investors Must Embrace QE’s ‘Financial Methadone’ on ThinkAdvisor.