When Ben Bernanke, the chairman of the US Federal Reserve, started talking about the tapering of quantitative easing (QE) last May, the markets reacted badly. It was not that anyone expected bond buying by the US central bank to carry on buying government and mortgage-backed bonds at the rate of $85bn a month for ever, it was just that there were serious doubts about what an end to QE would bring. May’s speech suggested the taper would start in September, but it was put on hold, allegedly because of concerns about the budgetary battles on Capitol Hill. That was another surprise, but not an unsettling one.
Third time around, in December at his last press conference as Fed chairman, Mr Bernanke announced that the bond buying would drop by $10bn in January. He went on to say that further QE reductions “are not on a pre-set course”, although applying a $10bn reduction at each of the eight meetings scheduled for the Federal Open Market Committee in 2014 would neatly see QE end in December. To calm the market’s nerve’s further, Mr Bernanke tweaked his forward guidance on when interest rates could start to rise. This had been previously set at when unemployment fell to 6.5% (it is currently 7%), but the Fed’s view now is that any rise likely to be “well past the time that the unemployment rate declines below 6.5%, especially if projected inflation continues to run below the Committee’s 2% longer-run goal.”
The ‘low for longer’ tone on interest rates pleased the markets, which powered ahead after the briefest of hiccups. The US equity market benchmark, the S&P 500, reached an all-time high. Thus Mr Bernanke’s eight year tenure at the Fed ended on a buoyant note. His successor, Janet Yellen, will now have to manage the QE taper without again frightening the markets and then start to consider how to unwind the Fed’s $4trn + balance sheet. It promises to be an interesting journey.
Meanwhile in the UK… Ben Bernanke may not be the only one using moving the goalposts on interest rates and unemployment targets. In the UK December witnessed a fall in the unemployment rate to 7.4%, just 0.4% above the trigger level at which the Bank of England will start reviewing its 0.5% base rate. We can expect some Bernanke-like finessing of that threshold from Mr Carney as the New Year gets underway.