by Peter Barker
LONDON, Dec. 19 (Xinhua) -- The taper in the quantitative easing (QE) program announced by the Federal Open Market Committee (FOMC) decision was a relief to markets, according to economists.
The Federal Reserve started the taper with the reduction of 5 billion U.S. dollars each from mortgage-backed securities (MBS) and treasuries.
Rob Carnell, U.S. economist at ING Bank, said the Fed had begun the taper in a larger scale than many were expecting.
He said, "Although markets will be relieved on some measures to see the taper finally start, after eight months of flagging and false starts, the scale of the initial taper seems larger than necessary, and larger than the consensus expectation."
Carnell added it was hard to argue with the FOMC's opinion that the risks to the outlook for the economy and for the labor market had become more nearly balanced given recent data flows.
In addition, it was reasonable to see improvements in the labor market and economic activity in the United States, despite the effects of fiscal retrenchment.
Carnell said that now tapering had begun it was likely to be added to in coming months.
"Now the genie is out of the bottle, it is reasonable to expect further tapering at coming meetings, depending on the flow of data," he said.
The FOMC explicitly highlighted ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective as conditions that would allow further reductions in the pace of asset purchases in measured steps.
"So assuming no shocks, we might well expect QE to fall by 5 to 10 billion U.S. dollars in the coming meetings of the FOMC," said Carnell.
Jim Reid, strategist with Deutsche Bank, said the true test of whether markets and the economy can handle the taper process will probably only be known in the first half of next year.
"But for now markets like the way the Fed has handled what was becoming an increasingly inevitable first move. We still have our doubts whether you can get from 85 billion U.S. dollars/month to zero without causing a problem somewhere in this still fragile global economy with low nominal growth and high debts," he said.
He added, "We also wonder whether low levels of global inflation will slow the Fed down at some point in 2014. For now though, the Fed has started a process that it thinks it will end in the latter part of 2014."
Reid said that, globally, central bank liquidity would remain high, due in part to current policies at the Bank of Japan and the shrinkage of the European Central Bank (ECB) balance sheet by 730 billion euros.
Reid said that the FOMC guidance language included two important qualitative additions. First, the FOMC stated that the current Fed funds target will remain unchanged until unemployment was "well past" the 6.5 percent threshold, and secondly that this was appropriate especially if inflation continues to run below the Committee's 2 percent longer-run goal.
Bernanke noted that the Fed remained concerned about the low level of inflation and said it would take appropriate action if inflation did not return to its target.
Reid said, "One could argue that the Fed has now put in place an inflation floor of sorts as well as an unemployment threshold of somewhere below 6.5 percent."