The Taper Has Arrived!

December 18th, 2013 at 2:40 pm

It’s taper-time, as the Fed just announced that starting next month they’ll be reducing their monthly bond purchases from $85 billion to $75 billion.  A change of that magnitude would not show up in the real economy–there are those who question whether QE shows up at all; I’d beg to differ–look at mortgage rates and housing activity, for one–but for its impact on expectations regarding the Fed’s future plans.

And here, paradoxically, I’d say today’s move is probably stimulative (that was certainly the market’s reaction).  First, tapering isn’t tightening; they’re simply reducing the amount of punch they’re adding to the bowl by a few tablespoons.  Second, there’s this new language from the statement today (my bold):

The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.

So from the perspective of monetary stimulus, the Fed giveth in terms of forward guidance and taketh away addeth less in terms of QE.

More to come…

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6 comments in reply to "The Taper Has Arrived!"

  1. Dilip says:

    Dr. Bernstein
    What do you think of completely removing unemployment mandate from the forward guidance as is being alluded to in this post:
    http://www.themoneyillusion.com/?p=25522


    • Jared Bernstein says:

      I wouldn’t go there. Very important to keep a labor market variable in the mix. Notable, in this regard, that Benny B pointed out they look at all the relevant labor market indicators, not just unemp.


  2. Tom in MN says:

    Should have known after seeing a Tapir on Leno last night — no one goes on that show without having something to promote.


  3. Dave says:

    Forgive me if I’m not optimistic.


  4. Peter K. says:

    Looks like stocks are up and bond markets, unlike in June, didn’t move. So the forward guidance overpowered the taper?

    I tend to think of the taper however small as tightening. The one dissent was Rosengren “who believes that, with the unemployment rate still elevated and the inflation rate well below the federal funds rate target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.”


  5. readerOfTeaLeaves says:

    Re:

    A change of that magnitude would not show up in the real economy–there are those who question whether QE shows up at all; I’d beg to differ–look at mortgage rates and housing activity, for one…

    I’m deeply skeptical that the housing market is actually in good shape. Google the phrase: ‘hedge funds buying up housing,’ and start reading the hits. Anecdotally, from talking to people trying to purchase in suburbs north of Seattle, ‘Canadian money’ (which is code for ‘money from Asia seeking safety’), and ‘suits’ (probably fronting for hedge funds), are outbidding homebuyers. And those institutional buyers are paying cash.

    This activity is raising housing prices a bit; typical buyers can’t realistically outbid a hedge fund. But it’s hard to argue that buying up rental properties is ever going to spark economic innovation.

    QE seems to have the effect of enabling an already too-financialized economy to continue financializing. It’s hard to see how that helps the underlying economy.


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