Perspective on the Taper

For the past several years, the Federal Reserve of the United States has been engaging in a form of quantitative easing. They determined it was necessary to engage directly in the markets after their primary stimulus tool of lowering interest rates had reached its lower bound. After QE1 and QE2 and QE3, we are now in QE Infinity. Under this plan, the Federal Reserve is purchasing a flexible amount of US Treasury securities and mortgage securities. The monthly amount until November 2013 was $85 billion.

FedReservesIn December 2013 and January 2014, the amount of purchases was reduced by $10 billion each month. This has meant the Federal Reserve only purchased $65 billion in securities during the month of January. For some perspective, I have charted the balance sheet of the Federal Reserve over the past ten years. It is nearly impossible to see the amount of tapering that has taken place since the quantity of assets on the balance sheet continues to grow.

Nevertheless, there seems to be quite an upset in the market through currency moves and emerging market turmoil. It seems that people aren’t reacting to reality but to the prospect of the future — a future without Federal Reserve purchases. With another six months, the Federal Reserve will be out of the market and somehow unwinding all of the purchases they have made over the past few years. The chart I have contains monthly data. I don’t know if the Fed will continue to decrease the volume of their purchases, though February could tell quite a story with the market movement over the past week.

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Author: dmcnic

Educated as an economist, I now work as an Analytical Professional for a manufacturing firm. I have have a second job as a part-time lecturer at the University of Washington in Bothell. While all baseball interests me, the Mariners are my home town team. Married with one dog.

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