Last week's decision by the United States Federal Reserve Board to begin tapering off its bond-buying program known as QE3 was long awaited; nevertheless, it proved to be a surprise. While the U.S. economy has improved, most analysts anticipated that the Fed would move next year when the recovery is expected to be on firmer footing.
Instead, it began the process of disengagement by moving cautiously forward with a small cut in purchases of Treasury bonds and mortgage securities. It is the right move.
The Fed embraced "quantitative easing" as a reluctant step to inject a large amount of funds into a moribund U.S. economy. Since the Great Recession of 2007-2009, U.S. politicians have rejected traditional Keynesian measures to create demand, focusing instead on balancing the federal budget, a decision that constrained government spending at the very time that private demand had dried up. Acknowledging that the Fed's mandate required it to keep an eye on both inflation and unemployment — the second has historically been an afterthought in its policymaking — the bank has undergone three rounds of bond purchases to compensate for the lack of fiscal stimulus. The third round, QE3, began in September 2012, and entailed a monthly purchase of $40 billion of T-bills and mortgage-backed securities. In December 2012, the amount was increased to $85 billion per month.