Fed Taper Uncertainty Might Be A Good Thing

Image via newphotoservice/Shutterstock

Stock markets around the world were cautious on Thursday as new signals from the Federal Reserve made tapering seem more likely than previously speculated. If the central bank does decide to reel in its monetary stimulus, stock markets are very likely to be depressed as money flows out of equities. The uncertainty over the future of the program may not be a bad thing, however.

Uncertainty is not always a bad thing. It keeps the market from settling into a single narrative, and makes investors more flexible to changes in the medium term. If the market was firm in its belief that QE3 would go on without disruption for the next year, the shock from a surprise taper could cause havoc.

Uncertainty At Federal Reserve

The Federal Reserve is in a period of transition. Once the new year rolls in Ben Bernanke will leave his seat at the table and be replaced by Janet Yellen. The market has been generally optimistic about the future of QE under Yellen. The reigning theory is that she intends to avoid tapering for some time, and there is no immediate worry of a slow down in the bond buying program.

That was thrown into disarray on Wednesday when the minutes from the most resent Federal Open Markets Committee were released to the public. The notes showed that there was strong support for tapering on the board of the Federal Reserve. The notes suggested that tapering would begin in the coming months if the jobs market were to continue its improvement.

Some analysts are looking for ta0ering to begin in December or January, but nobody knows for sure. The last round of taper talk suggested a start in September, but that never came to be. Tapering may or may not arrive before Yellen takes office. The uncertainty in the markets may be a key part of the plans of the Federal Reserve, however.

Quantitative Easing Needs Uncertainty

The Federal Reserve is not trying to mislead the market. The central bank wants institutions and investors to know that tapering might be coming, but they are not promising anything. The uncertainty is designed to lower expectations, it is not designed to lower returns or plant the seeds of fear.

Uncertainty is a powerful tool in the Federal Reserve’s belt. Taper talk is a way for the institution to prepare the market for a taper that may or may not be coming in before the end of the year. The Federal Reserve does not need to be predictable, it needs to temper the markets, protect them against the excesses of its policy and try to keep the markets stable.

Taper talk depresses the inflation in equities across the board. It reduces the effects of the bond buying program on certain markets, and hopefully readies it for future policy changes. Uncertainty is a good thing, and the Federal Reserve is planting it on purpose.