by Alasdair Macleod, Gold Money:
There is inevitable speculation that tapering might be announced at the FOMC meeting this Wednesday. It should be noted that this is Ben Bernanke’s swansong, and if tapering is to be announced he would probably go out with falling bond markets, falling equities and a soaring dollar, not to mention disruption of emerging market currencies such as the Indian rupee. For this reason perhaps opinion is odds-against tapering, but it doesn’t stop markets being nervous ahead of the event.
Those that think tapering is on the cards in the coming months have to produce a convincing argument as to how tapering is consistent with the overriding policy objective of no increase in interest rates for an extended period. Their assumption must be that zero interest rate policy sticks with us because there is little demand for money, so a reduction in its supply won’t affect rates unduly. This belief is at variance with the facts: interest rates are where they are because the Fed is keeping them suppressed with floods of extra money, and if the flood is made to recede, rates will simply tend to rise.
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