No rush to taper

The last minutes from the Federal Open Market Committee shows that the Federal Reserve’s interest-setting body has not lost its equanimity over the market turmoil it unleashed in June, when it said it may soon slow down, or “taper”, its asset purchases. It would not hurt to be slightly more concerned.

Fed chairman Ben Bernanke and his colleagues probably did not expect bond yields and other market prices to react as strongly as they did when they sought to prepare the ground for the taper. They had reason on their side: the Fed’s policy is explicitly contingent on the state of the economy, and the central bank has given clear guidance that the taper will only take place if the economy continues to improve as forecast.

So far, that is the case, as the end of July minutes underlined. Besides, the Fed has made clear in the past that even a taper does not constitute a tightening of policy. As long as it continues to accumulate Treasuries and other securities, the Fed in effect keeps adding to the stimulus it already has in place. To taper the purchases is to slow the monetary loosening.

…The Fed should not hurry to launch the taper as soon as September; it can wait until it better understands how the economy is reacting to market developments. Given how much of monetary policy action now lies in managing expectations, the Fed should signal more clearly that it will counter any unwanted tightening caused by markets.