Central banks are now the markets' best friends | Mohamed El-Erian

When the markets dip, the banks step in to help with stimulus. Such action may prove counter-productive

After a year that involved one of the biggest U-turns in recent monetary-policy history, central banks are hoping for peace and quiet in 2020. This is particularly true for the European Central Bank and the US Federal Reserve, the world's two most powerful monetary institutions. But the realisation of peace and quiet is increasingly out of their direct control; and their hopes would easily be dashed if markets were to succumb to any number of medium-term uncertainties, many of which extend well beyond economics and finance to the realms of geopolitics, institutions and domestic social and political conditions.

Just over a year ago, the ECB and the Fed were on the path of gradually reducing their massively expanded balance sheets and the Fed was increasing interest rates from levels first adopted in the midst of the global financial crisis. Both institutions were attempting to normalise their monetary policies after years of relying on ultra-low or negative interest rates and large-scale asset purchases. The Fed had raised interest rates four times in 2018, signalled further increases for 2019 and set the unwinding of its balance sheet on "autopilot". And the ECB had ended its balance-sheet expansion and begun to steer away from further stimulus.

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