The Federal Reserve Tapers: In Search of Calmer Waters

Yesterday’s decision by the Federal Reserve’s policy committee to modestly reduce (“taper”) its purchases of U.S. Treasury and mortgage-backed securities was a turning point in a number of respects.  After a long period of public debate that roiled markets, the Federal Reserve has at last begun what is likely to be a gradual and well-telegraphed exit from its period of extraordinary stimulus.  Together, last week’s fiscal deal and the Federal Reserve’s taper decision appears to have marked the start of a period of relative calm where U.S. macro policy uncertainty will be far less of a driver of markets. That’s good news for the global economy.

A few observations on the decision.

Over the past few years, both monetary and fiscal policy has been an extraordinary source of uncertainty.  Last week’s fiscal package took one set of risks off the table, and while the debt limit extension could be noisy (an increase is expected to be needed in March but could be stretched till May/June) the incentives for another crisis seem low for both parties. Now we have a monetary policy framework that markets seem to understand and welcome.  Together, the reduction in uncertainty could be quite constructive for investment and growth.