What the Federal Reserve's $10 Billion Taper Decision Means
The Federal Reserve just announced a $10 billion taper from its economic stimulus programs, citing an "improvement" in labor market conditions and "cumulative progress" towards maximum employment.
.The Federal Reserve just announced a $10 billion taper from its economic stimulus programs, citing an "improvement" in labor market conditions and "cumulative progress" towards maximum employment.
On the day of Ben Bernanke's final speech as Fed chairman before Janet Yellen takes over, the central bank shocked economic observers by trimming its Quantitative Easing stimulus efforts by $10 billion starting in January, indicating that the economy is slowly coming back.
Here's the important part of the Fed's announcment:
In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.
In an effort to keep the economy stable after the last collapse, the Federal Reserve decided to start buying government bonds and mortgage bonds, aiming to keep long-term interest rates down and stimulate the market. This effort is called Quantitative Easing. The last round, known as QE3, was left open with no set end date. As the economy recovers, the Fed recedes its QE efforts until eventually they don't exist at all.
The decision to taper was nearly unanimous among the Federal Reserve Committee, with only Eric S. Rosengren voting against it because he believes that "with the unemployment rate still elevated and the inflation rate well below the 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," according to the Federal Reserve's official statement.
But the Fed's many fans aren't exactly bursting with excitement over the taper. "That’s one tiny taper," remarks The New York Times' Annie Lowry, who says the Fed is "taking its foot off the accelerator ever so slightly," but "remains far from tapping the brake – either by raising interest rates, or by selling assets." CNBC's John Carney thinks the taper doesn't matter at all, really, an opinion written well before the Fed's announcement. Business Insider's Joe Weisenthall explains how the Fed's decision signals an end to the policies ushered in after the economy collapsed in 2008, and predicts the QE policies will end completely next year:
The main thing is that the Fed has started the path towards getting back to normal policy, where it's not buying a bunch of assets each month, and instead guiding policy by trying to adjust interest rates.
This is a first step, not towards proper recovery, but towards regular health.