Why Taper?

Matt Kessler

            The Federal Reserve recently came forward in a press conference saying that it would have as a goal the tapering of purchases by the Fed. This means that the Fed will slow down the buying of bonds and therefore increase in the money supply. This seems relatively straightforward, except people are wondering why exactly now was chosen to enact this policy. This action of tapering purchases would traditionally be considered more contractionary than the policy currently in effect. The reason people are questioning is that they have a hard time believing we are out of the recent recession a sufficient amount to cut back the expansionary policy. In fact, the Fed wants to continue the slowing of purchasing bonds as the year continues.

            The Fed has to try its best to anticipate actions and act accordingly, or it will always be hopelessly far behind. The problem is that nobody is exactly sure why it is the Fed has decided to cut back on its policy. The employment figures are essentially unchanged. The plan that was in place to help the economy recover from the recession is behind schedule, so it could be that those at the Fed are thinking that they will try to continue with the plan despite not seeing the indicators that would influence them to do so. There is some thought that the Fed has discerned a new trend in payroll. This is the idea that the payrolls of businesses are stabilizing. With greater stability, it could be assumed that the markets will grow and help the economy. Will it be enough to warrant the tapering ideas of the Fed? Many do not think so.

            It is fairly well established that the Fed has been taking actions to help the economy by pumping money into through the sale of assets, usually bonds. By choosing to slow the amount of bonds purchased, they are not enacting a purely constricting policy, but they are scaling down an expansionary policy. This process would indicate a recession or depression that has begun to bottom out and is now initiating recovery. It remains to be seen if the United States economy has reached that point. The numbers for the recession are getting slightly better, but by and large the expected improvement has not come to fruition. If the Fed thinks that there is some reason that would suggest the economy is sufficiently on its way to recovery that is justifies the slowdown of expansionary policy, it should by all means take this course of action. The issue is what this information is that is making such an impact. Even if payroll records are stabilizing and the economy is doing a better job dealing with taxes, the recession is still having an effect on the economy. The Fed will need to make clearer its course of action to ensure that other understand that it is the right path for America.

"Monetary Policy Bernanke: Mission Accomplished." The Economist. N.p., n.d. Web. 20 June 2013.

http://www.economist.com/blogs/freeexchange/2013/06/monetary-policy-1