The Federal Reserve: How to taper safely

AMERICA’S central bankers are in a tight spot. On September 18th the Federal Reserve must decide whether to begin to reduce (or, in the jargon, “taper”) the pace at which it supports the economy by printing money to buy bonds, from the current rate of $85 billion a month. Judging by its own earlier pronouncements, tapering is long overdue. In June the Fed’s chairman, Ben Bernanke, explained that he expected to have stopped buying bonds altogether when America’s unemployment rate fell to 7%. The jobless rate is now 7.3%, down from 8.1% a year ago. If the Fed plans to stop buying bonds by the time it hits 7%, it needs to start buying fewer of them fast. Ignoring the plan it laid out in June could compromise the credibility of its other promises, such as its commitment not to raise short-term interest rates until unemployment falls at least to 6.5%.

But the mere prospect of fewer bond purchases has already brought a sharp tightening in financial conditions. Since the taper talk began in late May, yields on ten-year treasury bonds have jumped almost a full percentage point, one of the biggest surges in decades, and a far bigger reaction than the central…

via The Economist: Leaders http://www.economist.com/news/leaders/21586313-combine-small-cut-bond-purchases-clear-commitment-support-economy-more-if?fsrc=rss%7Clea

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