Ben S. Bernanke, chairman of the Federal Reserve for a few more weeks, announced Dec. 18 that the Fed would begin tapering back on its $85 billion a month bond buying program. Bernanke said the Fed would buy $35 billion rather than $40 billion a month of mortgage backed securities come January, and $40 billion rather than $45 billion of long term Treasury bills.
Recent upbeat economic data and a bipartisan Congressional budget deal that promises to avoid another government shutdown in January made Bernanke’s decision to taper the $85 billion in monthly bond purchases easy to make.
Moreover, housing starts jumped 23 percent in November, that’s more than any time since January 1990. Upbeat housing data — along with falling unemployment numbers — may have helped the Fed to decide to cut back on its quantitative easing, or QE policy of bond buying to stave off inflation.
Bernanke, the architect of quantitative easing, is ending his tenure at the Fed by creating a clear pathway to his successor, Janet Yellen, whose key task when she takes the reins of the Fed in January will be to make sure that the end of the biggest Keynesian experiment with monetary policy in history doesn’t rattle markets — or derail the fragile recovery.
Some people believe the Federal Reserve has stirred a mini boom in the housing market that we are seeing now by printing money and keeping interest rates very low.
Still, the Fed isn’t out of the woods yet. Critics say the Fed has $3 trillion dollars of very long-term assets on its books. If interest rates rise 2 to 3 percent, their market loss could measure in the hundreds of billions of dollars. The danger is if interest rates rise.
Proponents of QE, however, argue that tapering stimulus now — just when unemployment hit 7 percent from 7.6 in June — is the wrong idea. Advocates want to keep interest rate low to encourage more home buying and hiring.
Here’s the Federal Reserve’s official statement.