Despite the fears, there was no Wall Street bloodbath when the Federal Reserve finally announced that it was scaling back its monthly parcels of free money to the financial markets. Share prices rose and bond markets – thought to be vulnerable to any move by the US central bank – shrugged off the news.
Clearly, the start of the long-awaited taper is a significant event. But it does not mean the Fed has turned hawkish. For a start, the quantitative easing programme continues, albeit at a marginally slower pace of $75bn (£45.8bn) a month rather than $85bn. It will be the end of next year on current plans before the tapering process comes to an end.
In addition, the Fed has softened an already doveish stance on interest rates by announcing that it intends keeping official borrowing costs at rock-bottom levels until well after the jobless rate falls below its 6.5% threshold level. This is a tapering but not a tightening, which is why stock markets responded positively to a decision only a minority of analysts predicted.
In truth, it was easy to see why the decision was taken. The recent news from the US has been good. Jobs are being created at a fair lick, consumers are spending money in the shopping malls, growth is currently the strongest for any G7 economy. The uneasy peace on Capitol Hill means there is no longer the threat of a government shutdown and tax increases and spending cuts will cease to be the drag on activity in 2014 that they have been this year.
There were two other reasons for the move. Officials at the Fed have started to question whether quantitative easing – buying US Treasury bonds and mortgage-backed securities in return for cash – has been an effective way of reviving the economy. The Fed is now sitting on trillions of dollars of bonds and would make enormous losses in the event of a bond-market crash.
Then there's Ben Bernanke's legacy. The outgoing chairman of the Fed, an expert on the economic policy blunders of the 1930s, has pursued an ultra-stimulative approach in his determination to avoid a second Great Depression. But he does not want to be blamed, as Alan Greenspan was, for creating bubbles by leaving too much stimulus in place for too long. He can now say that he initiated the winding down of QE before handing the reins over to Janet Yellen.
Does the Fed's decision have ramifications for other central banks? Not really, because all the major economies are at different stages of the economic cycle and have their own particular challenges to address. The one common factor is that central banks are winging it. Zero interest rates and QE were the response to a sluggish recovery, a broken financial system, heavily indebted consumers and the threat of deflation. But having created a world of stimulus junkies, central bankers are faced with the tricky decision of how to reduce the dosage. The answer from the Fed is plain: slowly and with great caution.
(c) 2013 Guardian Newspapers Limited.
Original headline: Federal Reserve starts taper – and avoids Wall Street bloodbath
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