Don’t Panic -Fed’s Tapering Won’t Strictly Mean the Foot on the Brake

After half a decade of interest rate cuts, financial markets have received a reminder that, at some point, we could see a tightening of the central banks’ monetary policy. The U.S. Fed has been the first of the large monetary authorities to change course, and the country’s economic recovery continues to go on, although at a still very moderate pace compared to its historical background.

There are still about two million jobs less than before the crisis peak, and additional stimulus in the form of negative interest rates is no longer justified. This is precisely what is behind the recent information that we have received from the Fed.

The Fed will start tapering by reducing the volume of bonds that currently buys on a regular basis. Naturally, the prospect of reduced demand from the central bank has led to a fall in prices, for example in the case of public debt. This has led to increased yields: thus, the profitability of the 10-year-treasuries has increased by more than one point since last May.

This process constitutes the beginning of a normalization of financial markets. However, the reduction of the volume of purchases in the coming months does not imply that the Fed will immediately begin raising interest rates. Using a simile, we could say that the Fed is beginning to lift the foot off the accelerator, but it is unlikely that Bernanke and company will imminently step on the brake.