Fed Taper Delay Bad News for US Economy

Even the suggestion that the Fed would scale back its quantitative easing programme by a token amount – a $10bn-a-month reduction to $75bn was Wall Street’s best guess – was enough to slow the pace of what is already the most anaemic recovery in America’s recent history.

Policymakers at the Fed were particularly concerned that the market response to the taper had been to push up the yield on US treasury bonds – a good guide to long-term interest rates – from 1.7% to 3% since Bernanke first floated the idea in May. That was enough to make mortgages more expensive and so affect the pickup in US housing demand.

So, when the Fed announced that tapering was off the agenda for the time being, the message for Wall Street was that the cheap money would remain in full swing. Interest rates would remain at rock-bottom levels until 2015 and the Fed would continue to print $85bn worth of electronic money each month. Shares rose to a record high, while bond yields and the dollar both fell.

But Wall Street often reconsiders its initial response to Fed announcements, and it may do so this time once the euphoria has worn off.

The Fed’s caution has confirmed that all is not well in the US economy. The taper was supposed to be a demonstration of strength; that after five years of ultra-stimulative monetary policy the time was coming closer when the economy would be able to stand on its own feet. By definition, therefore, the no-taper decision is an admission of weakness.

via The Guardian

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