Tapering, unguided

The Federal Reserve got itself into a cumbersome situation in recent months as it tried to establish an alternative monetary policy to that outlined in Ben Bernanke’s term. The release of the Federal Reserve’s April minutes last week presented a good opportunity to skim over its rough edges. The Fed has an incentive to continue tapering its asset purchase program. At 4.3 trillion dollars, the Fed’s Balance Sheet is more than five times larger than it were a decade ago. On the other hand, at currently 45 billion dollars a month, reducing asset purchases by 10 billion dollars can only continue for a limited amount of time – four Fed decisions to be exact. The Fed knows that once QE is off the table, it will need to address its future monetary policy. Providing any indication now as to what that might be has an increasingly larger effect on the markets. With the above a given, it is clear why April’s minutes, released on Thursday, had the incentive to convey a message of continued tapering. The usual review of the Fed’s take on the U.S. economy was provided at the minutes. Namely, it was mentioned that most of the meeting’s participants expected to see inflation returning to 2% within the next few years. Downside risks to growth were also said to have been found at the housing sector. A number of participants even expressed concerns that a persistent slowdown in housing could pose a risk to economic growth. Promises as to the day after QE3 ends were, however, avoided.