Tapering's here: this is not a drill

Fed chairman Ben Bernanke has set the wheels in motion to end the US' asset buying programme. Markets have reacted surprisingly gently.

by Emma Haslett
Last Updated: 27 Jan 2014

It's rather sweet that at his final meeting of the Federal Open Market Committee, US Federal Reserve chairman Ben Bernanke was able to finish what he started - or at least start to finish what he started - and set the wheels in motion to begin tapering the US' quantitative easing programme.

The choice of language is definitely appropriate - anything dubbed 'tapering' was always going to be gentle, but this is ridiculous: minutes of the meeting show the FOMC voted to ease back its bond-buying programme by a paltry $10bn, from $85bn to $75bn (although Bernanke suggested it was likely to continue next year 'if needed').

What's interesting is how markets responded. When Bernanke first hinted at tapering back in May, markets everywhere went into out-and-out panic mode. But then someone realised that 'tapering' equals 'US recovery' and over the summer emerging markets suffered as investors fell over themselves put their cash back into the US.

So when Bernanke made his announcement yesterday, the Dow Jones fell by a mere 0.4%, before surging 1.8% to close at an all time high of 16,167.97.

And in the event, emerging markets were actually pretty relaxed about it: although most currencies in Asia and South America weakened slightly, their governments shrugged it off. Dilma Rousseff, the president of Brazil, whose currency weakened by half a percentage point against the dollar, welcomed the move. And although the Japanese Yen fell to its lowest level against the dollar since 2008, Japan's main share index, the Nikkei 225, was up by more than 1%, as was Australia's ASX 200.

So it looks like Indian finance minister Palaniappan Chidambaram's point that emerging markets are 'better prepared than in May 2013 to deal with the consequences, if any, of the US Federal Reserve’s decisions', is about right. Bernanke gave them time to consider it, and they've reacted just as he had hoped.

When new, notoriously dovish, Fed chairman Janet Yellen takes over the reins in January, chances are that markets will start trying to second-guess when tapering will increase. It may have been a long time coming, but this is just the beginning. Whether a rise in tapering will yield as measured a response remains to be seen.

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