The ECB Shows It Has Won the Market's Trust

The European Central Bank's decision to reduce the pace of quantitative easing as of next year is the story of the dog that didn't bark. For months, the expectation was that this historic announcement would cause disruption in the financial markets, sending bond yields higher and stock prices lower. What we saw instead was a very orderly and even cheerful reaction -- showing central banks may have finally mastered how to communicate with investors.

The ECB's announcement was hardly trivial. When President Mario Draghi announced nearly three years ago that the central bank would purchase 60 billion euros ($70.16 billion) of bonds each month to fight off the threat of deflation, this was seen as a major change in the conduct of monetary policy. Unlike the U.S. Federal Reserve, the ECB had been reluctant to engage in quantitative easing. The fear, coming from Germany and other countries, was that it would amount to a financing of government deficits, which is prohibited by the European treaties. The move has undoubtedly been successful: Growth has returned to the euro zone, and the risk of deflation has disappeared.