Ben Bernanke’s final policy-making meeting as chairman of the Federal Reserve resulted in another $10 billion reduction of the central bank's monthly quantitative easing purchases. They are now down to $65 billion a month, from the $85 billion of purchases the Fed was buying every month in 2013.
Many economists now expect the Fed to continue reducing purchases by $10 billion a month, so long as the unemployment rate continues to fall. This month, unemployment dipped 0.3 percent, to 6.7 percent, although alternative unemployment measures, such as the employment-population ratio, have barely improved since the 2008 bust. Furthermore, it was a rather strange month on the employment front, because of unseasonably high numbers of workers out of work due to cold weather.
But a greater worry is the effect that the Fed’s tapering may be having on markets around the world. Since the Fed’s monetary stimulus programs began, billions of dollars have left the United States, to be invested in faster-growing emerging markets such as Turkey, Argentina, Brazil, Russia, India, and China. With the Fed tapering, and interest rate hikes on the horizon, many analysts fear that those investments will be reversed, resulting in a bloodbath in emerging economies.
Indeed, Turkey's central bank just this week dramatically raised its benchmark interest rate in a bid to shore up the country's plunging currency, the lira.
On one hand, I think these fears are rather misplaced. It is wrong to assume that the money flowing into emerging economies is a result of the Fed. Huge quantities of American investment were flooding emerging economies long before the Fed’s quantitative easing program began. Emerging markets have been growing at a rapid clip for the last 20 or 30 years, and volcanic economic growth attracts foreign capital irrespective of what policies Western central banks are following.
Additionally, recent events that have helped rock emerging markets in Turkey (a government corruption probe) and Argentina (police strikes, looting, and rampant inflation) are not even tangentially connected to the Fed’s decisions.
Furthermore, it is not the Fed’s job to monitor or promote stability in emerging economies. The Fed’s mandate is low inflation and low unemployment in the United States.
But on the other hand, if the market wants to get itself into a huff due to tapering, the Fed could have just as easily taken a wait-and-see approach. By delaying tapering for at least another month, the Fed could see whether the trouble in emerging markets is hurting the United States, as well as better gauge whether the labor market in the U.S. is really improving.
Inflation remains below the Federal Reserve’s two percent target, so it is not like the central bank is up against inflationary pressure. The Fed had room to maneuver, and perhaps proceeding with another taper was a premature and risky move.
However, the Fed has room to maneuver next month, too, in case markets continue to weaken or the unemployment picture worsens.