Paul Lachine

The Taper Chase

Global financial markets were stunned when the US Federal Reserve announced on September 18 that it was not ready to begin the widely anticipated slowdown of its long-term asset purchases. There are three possible reasons why the Fed shifted its plans so dramatically, and all point to continuation of quantitative easing.

CAMBRIDGE – Global financial markets were stunned when the US Federal Reserve announced on September 18 that it was not ready to begin the widely anticipated reduction in the pace of its “quantitative easing” (QE) program. Fed Chairman Ben Bernanke said that the Fed would continue its monthly purchases of $85 billion of long-term securities. Understanding the reasons for the Fed’s unexpected change of plans may help to anticipate what is coming next.

After Bernanke announced in May that the Fed intended to “taper” QE, investors began to expect that some reduction in the pace of asset purchases might begin in the early fall. As a result, the interest rate on ten-year Treasury bonds increased by nearly 50 basis points, from 1.66% on May 1 to 2.13% on at the beginning of June. Bernanke’s press conference after the next meeting of the Federal Open Market Committee (FOMC) on June 19 caused a further rise in the ten-year rate, to 2.5% on July 1 and then to 2.92% just before the Fed’s September meeting.

In short, the market was clearly expecting that the tapering would begin in September and that the asset-buying would end in mid-2014. There are at least three possible reasons why the Fed shifted its actions and policy guidance so dramatically.

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