Some Post-Tapering Announcement Observations

In one sense, the Federal Reserve’s tapering announcement last week is no big deal: the Fed will continue its massive quantitative easing (QE), and cutting back asset purchases by $10 billion per month is tiny relative to $2.5 trillion outstanding in excess bank reserves already created through QE (the Fed has emphasized the importance of stocks rather than flows); moreover, the Fed will continue to anchor its target policy rate to zero.

In another sense, the Fed’s announcement is significant, insofar as it begins the process of an eventual normalization of monetary policy following five years of unprecedented monetary stimulus. Through its forward guidance and its economic and interest rate forecasts, the Fed plans on an elongated adjustment period.