A Tame Taper

The Federal Open Market Committee’s (FOMC’s) reductions in the pace of asset purchases have proceeded smoothly so far, St. Louis Fed President James Bullard said in a recent presentation. The impact of the FOMC’s taper this year has been tame compared with the “taper tantrum” last summer.

President Bullard noted that the FOMC took no explicit policy action at the June 2013 meeting, yet triggered a significant movement in global financial markets. “The taper tantrum during the summer of 2013 was based on perceptions of Fed actions,” he said. During that time, longer-term U.S. interest rates increased, emerging market currencies depreciated against the U.S. dollar, capital flowed to the U.S. and emerging market stock indexes declined.

The actual decision to begin tapering did not occur until December 2013. Since then, the FOMC has reduced its pace of asset purchases four times by $10 billion each time. “Yet the effects on global financial markets have been much less striking,” President Bullard noted. For example, the figures below show the 10-year U.S. Treasury yield over the two periods. (Note that the range on the vertical axis is much smaller in the second figure.)

How might the different financial market responses be interpreted? “One interpretation is that as of June 2013, it was premature to argue that the U.S. economy was strong enough to pull back on asset purchases,” President Bullard said. “As of December 2013, better growth and employment data justified the taper decision.”

He also discussed other recent themes in U.S. monetary policy during his presentation, including the weak U.S. GDP growth at the beginning of this year and how close the FOMC is to its policy goals relative to the past five years.

• News Release:  St. Louis Fed’s Bullard Discusses the Fed’s Taper, GDP Growth
• Presentation:  A Tame Taper
• On the Economy:  Why Inflation Matters in Setting Monetary Policy