The Fed’s Tiny Taper

Planet Money graphed it. They had to start their chart at $3 trillion because otherwise “you wouldn’t even be able to see it”:

The Taper

Matthew O’Brien approves of the Fed’s decision:

[T]he Fed will “taper” its purchases from $85 to $75 billion of bonds a month. And it will keep doing so in $10 billion increments next year as long as the recovery stays on track. But it will try to inject just as much monetary stimulus as it’s taking out by strengthening its promises. The Fed now says it will likely keep rates at zero “well past” the time unemployment falls below 6.5 percent, especially if inflation stays below its 2 percent target.

Markets approved. Stocks jumped, bonds didn’t fall, and expectations of future rates barely budged. In other words, Bernanke finally convinced markets that tapering isn’t tightening, even though he said it was a few months ago. Neat trick.

Daniel Gross’s take:

[T]he Fed isn’t really putting on the brakes. It is just taking its foot off the gas pedal a tiny bit. And as Bernanke passes control of the steering wheel to Janet Yellen, it’s still going at a very rapid clip.

Cassidy comments on the Fed’s other announcement, “that it would most likely keep interest rates at their current record-low levels even after the unemployment rate falls below 6.5 per cent—a figure it had previously identified as a possible threshold for rate hikes”:

That was a shift in the dovish direction. As if to emphasize it, Bernanke insisted that the taper itself did not signal a move toward a more restrictive policy, saying, “This is not intended to be a tightening…. We do not think there is an inflation problem, or anything like that.” To the contrary, Bernanke stressed that he and his colleagues were concerned about the inflation rate being too low: it’s currently running at about one per cent, well below the Fed’s target of two per cent. The Fed chairman even raised the prospect of the central bank further loosening its policy stance, saying, “If inflation does not show signs of returning to its target, we will take appropriate action.”

It was a bit like a mother warning a child that she would gradually reduce the number of bags of M&Ms he could eat every week, but, at the same time, reassuring the boy that his supply of Snickers bars would be uninterrupted, and might even be stepped up if he started to lose weight.

Ezra wishes that Congress had worked with Bernanke instead of working against him:

There’s an alternate history of the last three years in which Bernanke held rates low and Congress used the opportunity to rebuild America’s infrastructure, passed a huge tax cut for businesses that hire new workers, helped state and local government reinvest after the vicious cuts forced by the recession, and wiped out the payroll tax until further notice. That’s a world where millions more Americans have jobs today. And it’s a world Bernanke did everything he could to help Congress create.