Federal Reserve Chairman Ben BernankeSusan Walsh/The Associated Press
Sometimes it can be good news that the capital markets are in distress. On Thursday, investors (include those on the TSX) vividly expressed their anxieties about a future event – the end of Federal Reserve Board's quantitative-easing policy –an event that has not yet been announced or scheduled. It is wholesome to get the grief and lamentations over with, ahead of time. Perhaps that was the subtle intention of the American policy-makers.
All this was set off by the Federal Reserve's chairman, Ben Bernanke, saying on Wednesday that he and his colleagues on the Federal Open Market Committee thought "the downside risks to the outlook for the economy" of the United States had diminished – in itself, good news. The markets interpreted this as meaning that the Federal Reserve would first "taper" and then terminate QE (the third series thereof), somewhat sooner than had been expected.
The tapering of QE will consist of a slower pace of buying, in other words, a continuing accumulation of assets – not a gradual resale of assets, off the central bank's balance sheet, back to the wide world of the public markets. As Mr. Bernanke put it, this is "letting up a bit on the gas pedal as the car picks up speed, not beginning to apply the brakes."
QE was designed to stimulate the economy through the capital markets. In a sense, this was a subsidization of the markets. It made it easy to make money – in the medium to long term, all too easy to do so. In general, an economy works well when the participants are selective in their purchases; QE has tended to make investors less discriminating – and, on the other hand, those who want higher returns have to grasp more tenuously for high-risk investments.
Moreover, the end of QE – perhaps in the middle of 2014 – would still leave American interest rates at a minimal level for some considerable time – still making it difficult for many ordinary savers to really be saving for their retirement.
The amount of change observed in the "downside risks" is hardly overwhelming. Nonetheless, Mr. Bernanke and his colleagues are right to shoot across the bows of the capital markets. It is time for investors to get ready for some normality. The good news that is taken as bad news can have a healthy effect that is, after all, good news.