Don’t Be Fooled by the Fed’s Taper Talk
Question: Suppose the Fed doubles the supply of ”high-powered money” (monetary base) from around 15 percent to 30 percent of US GDP over a period of less than two years, then announces that the pace of increase will slow to just above zero within the next year providing that the economy remains “on course”; does this amount to a serious attenuation of monetary inflation?
The Fed’s prospective “taper,” now the endless subject of the twenty-four-hour financial TV news cycle, provides a case study for explaining this response.
The US central bank, on course to deliver this year a record amount of inflation tax revenue to the federal government, is now using all its instruments of propaganda to tell us about its looming “monetary normalization” program, otherwise described as “tapering.” An ostensible aim is to keep markets calm.
By the time the gradually preannounced six- or nine-month wind down in the Fed’s asset purchases gets underway we should all be prepared. The Jackson Hole conference (August 26–28) completes the process of getting us ready. The calming information which features in the preannouncements is designed to foster a continuous smooth adjustment rather than any shock response.
So far, top Fed officials are most likely congratulating themselves on a job well done.
Although by now everyone and their dog knows that the Fed intends, on the basis of present economic projections, to stop further net purchases of bonds by summer 2022, there has been no steep sell-off in US long-term rate markets or more widely. That is different from the notorious days preceding and during the Bernanke Fed’s tapering of 2013–14.
Reality check: the calmness is not due to Fed communication skill but to the fact that hardly anyone now, unlike in that earlier episode, misguidedly views tapering as a preparation for the end of monetary inflation.
Even so, market analysts in and outside the Fed are understandably wary of what we could describe as “emperor’s new clothes effects.” This is wh
Article from Mises Wire