To Taper or Not to Taper

Posted by Mark Jasayko, CFA, Portfolio Manager

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McIver Wealth Management Consulting Group / Richardson GMP Limited

The U.S. Federal Reserve is widely expected to “Taper” it’s rate of purchasing mortgage bonds and Treasury bonds with newly printed money from a rate of $85 billion per month to about $70 billion. Some analysts argue that there are encouraging signs of economic growth in the U.S. and this reduced the need for massive liquidity injections.

However, those promising signs of economic growth are mostly the direct result of massive Quantitative Easing (QE). The recovery resembles “blowing into one’s own sails” and once QE slows, it is reasonable to expect that the economy will do so as well. The bottom line is that the amount of momentum built up by the QE experiment is suspect. There just is not much inertia. If there was, we would easily be able to see it.

Despite the lack of economic growth (and the fact that the so-called recovery is the most anemic on record following a recession), there is a surprising amount of consensus to begin “Tapering.” Some of the voting members at the Fed are concerned about the long-term adverse effects of QE, and so they should. However, I get the feeling that there is some urgency to prove that QE has worked. This is because Chairman Ben Bernanke’s term expires this upcoming January and it appears very likely that Obama will appoint someone else to the role. QE has been the centerpiece of Bernanke’s tenure. Instead of a policy that has worked well enough to allow him to scale it back, it has only grown in magnitude over the last five years as each earlier installment proves to be insufficient to meet his expectations.   That said, it could be seen as an indictment against his leadership and foresight it he leaves after eight years with the money-printing spigots left wide open. If he can “Taper” in at the September meeting of the Federal Open Market Committee meeting and again before the end of the year, he might be able to point out that he is confident that it is time to scale back his policy experiment, declare victory, retire, and then hope for the best.

So, we can probably expect a “Taper” in a couple of weeks.

This is not the way a central bank should operate, but after a quarter of a century of dovish-leaning policies, maybe there is not much choice at this stage.