The decision by the US Federal Reserve to reduce the volume of its securities purchases by $10bn a month is best dismissed as a taper in a teapot. It is much sound and fury signalling little.
In effect, the Fed tightened current monetary policy almost indiscernibly, while also using forward guidance – that is, this month’s statement by the Federal Open Market Committee – to indicate that future policy would remain loose for at least slightly longer than previously anticipated.
This was a sensible way to tweak the time profile of monetary policy. The US economy has been doing a little better than expected of late, and therefore is now able to digest this slightly tighter policy.
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