Five years after the launch of quantitative easing, the US Federal Reserve has begun to unwind. On the day of Ben Bernanke’s last press conference as chairman, the Federal Open Market Committee has decided that it will finally scale down its $85bn-a-month asset purchases programme. The US monetary authorities will now buy $10bn fewer Treasuries and mortgage-backed securities each month.
The very idea of “tapering” has the ability to inspire awe in markets. But the direct impact of the Fed’s actions should be negligible. The central bank will still be pumping money into the economy, if only a little more slowly. Even the change of pace must be put into perspective. By the central bank’s own back-of-an-envelope calculations, $200bn in purchases are equivalent to 25 basis points of the policy rate. A $10bn reduction is therefore worth a 20th of that. Under normal circumstances, investors would barely notice.
But these are not ordinary times. Wednesday’s decision means that the largest and most unprecedented monetary experiment in the Fed’s history is beginning to come to an end. When the Fed contemplated withdrawing its stimulus last May, both mortgage rates and US government bond yields shot up. Assets and currencies in emerging markets plummeted, too, as investors fled for safer havens. The fear is that the actual decision will lead to a new wave of market turmoil.