Fed Tapering: It’s About Time!
Ten years from now economic historians will look back and point to last week and cite it as the point at which U.S. Federal Reserve Chairman Ben Bernanke took the wind out of the sails of a potentially very dangerous asset bubble build-up. His announcement that the Fed would look to "taper" off asset purchases, currently running at 85 billion pounds per month, sometime in 2014 providing economic indicators continued to improve was timely and logical.
Yes, equity markets sold off in big chunks, and continue to do so, but that was entirely expected and won't do any harm at all – in fact it will do a lot of good as it pulls investors up and gets them to start assessing true value. Yes we had all the words about how it could be potentially disastrous and had to be timed right and markets were still fragile blah blah blah….but that is from people who are guilty of simply putting off difficult decisions. It would not have got any easier the longer we left it.
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Here is Andy Haldane, a senior executive at the Bank of England, in evidence to a U.K. Parliamentary committee recently:
"Let's be clear. We've intentionally blown the biggest government bond bubble in history. We need to be vigilant to the consequences of that bubble deflating more quickly than [we] might have otherwise have wanted."
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Every part of that statement is certainly very true. And the sell-off in stock markets, and rising bond yields, are a clear sign of how any premature wind-down of central bank action can create panic and contraction in economic activity.
But there is never going to be a perfect time to start this action. Here is one thing we do know: when one is addicted to something, the longer one puts off withdrawing from that addiction makes the eventual withdrawal harder. This will not get easier the longer we wait, rather the contrary: every day putting off this difficult decision makes the impact harder to bear when it finally comes.
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A raging bull market built on central bank action is not "real". It's fake. It's an illusion. A mirage. And like any mirage, it will disappear by the time you get there. Central bank action is a weak foundation to build anything solid on. Investors have been piling into shares all year in the belief that they can't lose: if markets go up, they win; and if markets go down, the central bank will throw in more cheap money and more asset purchases and markets go up – they win again. This is not just unsustainable, it's dangerous.
It's not as if QE is being unwound now and rates are going up next quarter. This tapering is perhaps a year away, and rate rises even further down the road. Enough time for markets to start standing on their own two feet…it's about time.
Professor Moorad Choudhry is at the Department of Mathematical Sciences, Brunel University and author of The Principles of Banking (John Wiley & Sons 2012).