The U.S. Federal Reserve Board of Governors has decided to reduce quantitative monetary easing beginning in January. First, it will curtail its $85 billion — approximately 8.8 trillion yen — per month of bond purchases by $10 billion.
The economic recovery is gradually gaining a firm foothold in the United States, and the management of financial affairs has helped avoid disorder. It is natural that the Federal Reserve Board of Governors is looking for a way out of the bold quantitative easing stemming from the “Lehman Shock.”
However, it will be a long time before bond purchases are suspended and the zero-interest rate policy is terminated. To minimize the impact on the world economy and financial markets, I would like the FRB to strive for transparent and flexible policy management.
The FRB has indicated a policy of gradual bond purchase reduction, which will continue into the second half of next year. Monetary restraint is not necessarily the intent, and the FRB will purportedly continue the zero-interest rate policy until the unemployment rate falls below the stable 6.5 percent.
Market upset has been avoided, partly because this sort of report builds a sense of security. We may evaluate this as a step toward normalization of monetary policy.
However, it is difficult to predict what will happen. Long-term interest rates in the U.S. are rising in connection with the reduction of quantitative easing, and recovery of the housing market and consumer spending could be hindered. The FRB cannot quell concerns that capital is flowing out of emerging markets and dragging down the international economy.
While assessing economic conditions, the FRB needs to skillfully moderate the pace of quantitative easing reduction. This will require great effort to make effective judgments and incorporate the changes into the market.
FED Chairman Ben Bernanke is the one who took steps toward the reduction of bond purchases, but it is incoming Chairman Janet Yellen who will be responsible for both the process of bond purchase reduction and removal of the zero-interest rate policy. I would like them to exercise ingenuity not just to maintain policy management continuity, but also to improve interaction with the market.
I also have a request for the ruling and opposition parties in the United States. They must refrain from exposing the U.S. economy to danger by avoiding a repeat of conflicts over policy management. Even after coming to an agreement over the easing of forced spending cuts and so forth, both parties should compromise on the upper limit of the federal debt ceiling as well.
Japan, too, cannot help but feel nervous about the long-term interest rate and fluctuations in stock prices. The Abe administration should cement the foundation for Japanese economic growth.
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