At times, policy makers find themselves in the role of magicians, especially when they are pivoting from one well-accepted policy stance to another less certain one. In fact, this is what the US Federal Reserve will be doing in the next few weeks – perhaps as early as next week (a 50/50 chance), more likely in January and most definitely by the end of March.
As signalled already by Fed officials, and as nearly implemented in September, the central bank is on the verge of altering its policy mix in a material fashion – gradually reducing its reliance on monthly asset purchases (which have been held unchanged at $85bn since the announcement a year ago) and relying more on indirect tools. Put another way, the Fed is seeking to maintain its support for the US economy and markets while reducing the use of a highly experimental tool that, many believe, risks longer-term collateral damage and unintended consequences. Continue reading »