As previously mentioned by Marc Farber, if there’s any ‘taper’, it will be largely symbolic and the problem will only resurface sometime soon down the road.
“So at some stage the economy will weaken again, and at that point, the Fed will argue, ‘Well, we haven’t done enough, we have to do more.'”
The Federal Reserve will reduce its $85bn a month in bond purchases by $10bn starting in January
The US Federal Reserve last night announced plans to start weaning America off quantitative easing (QE), in a move which signals the central bank’s confidence in the stability of the US economy.
The central bank said that it will pare its $85bn-a-month bond buying scheme back to $75bn next month, and continue ratcheting it down in “measured steps” if the US economic recovery remains on course.
The scheme was put in place to help boost the US recovery in the wake of the financial crisis, by effectively pumping extra money into the economy. Withdrawing the artificial stimulus will act as a drag on growth, but it is also likely to be welcomed by critics of QE who fear that America was fuelling asset price-bubbles and storing up trouble for the future.
It is also likely to put pressure on other central banks around the world, including the UK, to start reducing their own QE habits.
The decision follows many months of speculation over when the Fed would start weaning America off the scheme.
December’s FOMC meeting was the last opportunity for the Fed to take action under Mr Bernanke, whose eight-year tenure as chairman comes to an end next month. He will be replaced by Janet Yellen, currently the deputy chairman, and one of the strongest advocates of the Fed’s heavy focus on using fiscal stimulus measures to boost jobs growth.
Mr Bernanke insisted that Mrs Yellen firmly backed the tapering decision. However, the FOMC added that tapering was not on a “preset course” and that it could be ratcheted upwards again if the recovery did not remain on track.
Full article: Federal Reserve begins tapering massive bond-buying programme (The Telegraph)