The Fed decision to slow down by $ 10 billion the monthly purchase of Treasuries and mortgage-backed securities has sparked speculation on the end of the prolonged cheap money era. Yet, monetary authorities on the other side of the Atlantic will continue to pump a substantial amount of liquidity in the coming months. They also pledge to keep close to zero the discount rate, even if unemployment holds comfortably under the 6.5% threshold. It comes as no surprise that markets have reacted in a positive mood to such announcement.
This mild taper comes 15 months after the Fed embarked on an aggressive policy for invigorating the economy. Since then, it has bought assets worth more than $ 1 trillion, the central bank balance sheet swelling to an unprecedented $ 4 trillion record. The huge stimulus has largely avoided the prospect of a downturn, maintaining US growth afloat. Still, gains on Wall Street have largely outperformed those on Main Street. There are clear signs that a wealth-led recovery fails to deliver a robust self-propelled growth. Not to mention the daunting prospect of fuelling a financial bubble that might eventually threaten stability.
The Fed has acted timely to start defusing a source of future concern. An open-end public deficit monetising leads over the long term to a credibility gap. Flooding the economy with a liquidity deluge dangerously narrows the room of manoeuvre for enforcing a sound policy should the need arise to address inflation.
Resorting to cheap money has indeed provided a vital support to a faltering economy. Yet, sticking to unemployment as the main monetary yardstick has undoubtedly shown its shortcomings. It stands as a rather unreliable benchmark, once the acute output gap becomes gradually skimmed. No one can safely gauge the structural level of those temporarily in the dole. The more so as the US unemployment figure has markedly improved over the last months due to a sharp fall in people actively searching for a job. While ensuring GDP growth or reining in inflation stand as easily observed barometers, conducting monetary policy on jobs seems a far riskier and unpredictable endeavour.