Federal Reserve Chairman Ben Bernanke.The Associated Press
Globe editors have posted this research report with permission of Scotiabank Economics. This should not be construed as an endorsement of the report's recommendations. For more on The Globe's disclaimers please read here. The following is excerpted from the report:
The debate over exactly if, when, and by how much the Federal Reserve will reduce asset purchases oversimplifies the richness of policy options facing the Federal Reserve.
We think there are six reasons why tapering at this juncture would be a policy misstep that would be reminiscent of Fed chairman Bernanke's past criticisms of the Bank of Japan.
The evidence of frothy behaviour in financial markets has significantly abated since May when the Fed chairman first suggested that purchases could be lowered 'later in the year'. Tapering now would risk pushing U.S. 10s well above 3 per cent and dragging mortgage and corporate borrowing costs still higher to the detriment of housing markets and capital spending.
To avoid lighting up market excesses all over again, however, the Fed would have to retain or expand conditional language behind eventually tapering if it chooses not to do so yet.
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