So far so good for the Fed

The Federal Reserve’s programme of quantitative easing, which it is now winding down, has been a momentous step into the unknown.
But some rules of central banking never change. As ever, the words that accompanied its announcement on monetary policy matter far more than the substance of the policy behind it.
Ben Bernanke has the symbolic gesture he wanted before he leaves: bond purchases will start to taper off next month, from $85bn per month to $75bn, but the announcement also minimised the market discomfort.
The Fed volunteered that “asset purchases are not on a preset course”. Future tapers, Mr Bernanke made clear, will depend on unemployment and inflation.
Mr Bernanke now says the current effective zero target Fed Funds rate will stay in force “at least until the unemployment rate reaches 6.5 per cent” – which the Fed’s governors do not expect to happen until the end of next year – and that it will “likely” be appropriate to keep rates at virtually zero “well past the time” that unemployment dips below 6.5 per cent.
So the Fed has sent the signal it wanted – that the era of open-ended easy money is coming to an end, but only while promising that rates will stay historically low long past next year.
As 10-year bond yields are roughly double the level from the low they hit in 2012, the Fed has already successfully engineered a moderate tightening, without scaring stock markets, which reacted well to the taper news. So far, then, so good.
Many challenges lie ahead. The tapering process could yet spark a crisis in emerging markets; if inflation falls, it may have to reverse course and keep making asset purchases; and if the “feather-bedding” has been overdone, the US stock market, already looking expensive, could “melt up” into a bubble.
But, for now, the Fed has managed the first stage of exiting QE as well as it could possibly have hoped.

John Authers

Fonte: FT