There was havoc around the world when Ben Bernanke first hinted that the Federal Reserve might “taper” the stimulus programme supporting the US economy before the end of the year. From Turkey to India to Brazil, currencies plummeted and stock markets tumbled as the prospect of recovery in America threw high-risk emerging markets into the shade.
Now, a mere seven months on, the Fed’s decision to go ahead and trim its monthly bond-buying has had quite the reverse effect. True, some currencies dipped slightly – the Indian rupee, for example. But equities rallied strongly, not just on Wall Street but across the world.
In part, the rapturous welcome that Mr Bernanke’s announcement received yesterday reflects investors’ relief that the uncertainty about when tapering might begin – and what form it might take – is finally over. In part, too, the implications of a more robust US economy are now already priced in, and emerging markets are less overvalued than they were, following the ructions over the summer.
But there is also some simple good news here: quantitative easing can start to be wound down because the world’s largest economy is doing better than it was. Jobs growth is going strong, as are retail sales and manufacturing activity. There are even signs of a congressional budget agreement, reducing the risk of another costly government shutdown.
All of which is an unequivocal plus – for the US and the rest of us. The sooner that developed economies are weaned off central bank-administered stimulants, the sooner the global system returns to business as usual.
It is as well to keep this week’s Fed decision in proportion, however. Given the qualms about quantitative easing, Mr Bernanke will have been keen to preside over the beginning of the end before handing over to his successor, Janet Yellen, early next year. And, while the symbolic value of the move is not in doubt, the measures set out this week constitute only the tiniest of baby steps back towards normality.
After all, in the first instance only $10bn will be cut from the bond-buying programme; the Fed will still be taking on an extra $75bn worth of securities each month. While the plan is for the amount of new money being pumped into the economy to be steadily reduced, reaching zero perhaps towards the end of 2014, if there are signs of stress – slowing growth, say, or rising unemployment – then the taper will be paused, if not reversed. Furthermore, and no less importantly, Mr Bernanke also made clear that interest rates will remain close to zero at least until unemployment is below 6.5 per cent (it is currently 7 per cent) and quite probably considerably longer.
This was policy tightening in only the most nuanced sense, then – the slight tweak to bond-buying more than balanced out by the forward guidance on interest rates. Quite right, too. If QE was an unpredictable experiment, the tricky business of winding it down is even more so. As the gyrations earlier in the year made painfully evident: the slower, and gentler, the better.