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The Tapering Off Of Qe Iii

751 words - 4 pages

The Impacts of The Tapering Off of QE III


In June of 2013, at the Federal Reserve’s Policy meeting, Chairman Ben Bernanke announce the Fed’s plan to eventually taper off Quantitative Easing (QE) III sent investors and economic analysts into a panic. Bernanke tried to effectively explain the reasoning behind their decision to taper QE, but all that was heard by the market was were their intention to tighten the money. This news is so unnerving to the market because they believe it will only lead to substantial market and economic disruption. During the next couple of days following the June meeting, the market went crazy as stocks dropped by 4 percent and many ...view middle of the document...

This is because as deflation rises the real return on cash rises as well. As a result of this the demand for goods will decrease which will act to increase the deflation as well. The next impact on the economy is that when deflation occurs as rapid as this, the real burden of debt will rise for households, firms, and the federal government. This will also lead to higher incidence of default, which will ultimately deplete the assets, ability, and willingness of lenders. Lastly, if the Fed tapers QE then the labor markets will suffer and the unemployment rate will increase. Because of the deflation, wages will fall slower than prices will which will reduce the demand for labor. Recently real wage growth has been slowly increasing nearing zero and employment growth has been very slow. Deflation will just cause real wages to grow faster and for employment to suffer a faster decrease in growth.
There are a lot of potential outcomes of the tapering of Quantitative Easing and they all point into the direction of deflation given the current state of the economy. In theory, if the economy was under ideal conditions, then the taper of QE would point to bond yields to be higher and that the yield of short-term securities would be expected, on average over the horizon, to be...

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