Why the Fed Must Really 'Taper'

“To taper.” In other words, “to unravel,” “to decrease gradually.” Ever since Ben Bernanke, the chairman of the U.S. Federal Reserve, used this term, investors haven’t talked of anything else. How will the Fed go about its “tapering?” Clearly, the rate at which it will reduce its asset purchases — state loans, mortgage loans and other commercial paper purchased each month on the market — will return to more reasonable proportions to restore a market that has quadrupled in five years. Bernanke must outline his response tomorrow evening, although the financial community is not waiting for his press conference to anticipate what he will say.

The exercise is all the more perilous given that the Fed has no experience in this matter. The pilot of the world’s largest economy must address this shift without compromising the recovery in the U.S. or provoking a storm in the markets. But the first signs of stormy weather have appeared even before the “tapering” has begun … Interest rates have risen violently in the U.S. — and, as a result, in Europe — reminiscent of the unfortunate precedent of the bond crash of 1994. If the Fed wants both feet on the brakes, it needs to take its foot off the accelerator: It is rumored that it will reduce its monthly asset purchases to $75 billion instead of the current $85 billion … But investors are rarely in the dark about the Fed’s actions, and they have been quick to equate the beginning of “normalization” to a tightening of monetary policy.

In this storm, however, there is some good news. This is a clear sign that the U.S. economy is getting better, that it can get rid of its crutches and move forward, and that it is ready to cash in on a rising dollar. It also shows that the fiscal authorities are aware of the need to contain speculative bubbles formed due to the abundance of global liquidity — bubbles which, if they burst, could be very expensive. Finally, this is a warning to all states: They cannot rely forever on advantageous interest rates to accelerate deleveraging. A biting but useful reminder to the U.S., where new negotiations on the debt ceiling are beginning, as well as in Europe, where growth remains much too soft to revive still lifeless public finance.