(Bloomberg Opinion) — The safety latch has been released on global monetary policy. Prospects that the Federal Reserve starts reining in stimulus are alive, and a troubling signal for Asian economies that took dramatic measures to support their recoveries.
Minutes of the Federal Open Market Committee’s April meeting, released Wednesday, suggest it’s increasingly plausible that the Fed begins to taper its $120 billion-a-month quantitative easing by year-end. This idea has been background chatter in Asian markets for a while, but was generally seen as a remote possibility. In the meantime, central banks around the region sought loose policies with impunity from investors. In Australia, officials adopted bond buying and yield-curve control, while debt monetization and a similar approach (in all but name) proceeded in Indonesia and the Philippines. South Korean officials could resist calls to pare their own accommodation. And China, far advanced in its recovery, could afford to talk about normalizing, confident that ultra-easy U.S. money would juice the global scene — and supports exports, a vital condition for expansion.
The minutes revealed that a number of policy makers favored a discussion about adjusting asset purchases at coming FOMC meetings. Sounds reasonable. If you foresee the central bank lifting its benchmark rate in 2023, or sooner amid concerns about overheating, then quantitative easing must be retired first — gradually, of course, so as not to frighten the horses. Doing the backward math, that means tapering by around the end of 2021. Chair Jerome Powell’s address to the Kansas City Fed’s annual retreat at Jackson Hole in late summer might be a good place to start.
Why is this such a big deal? After all, we knew it was coming: The U.S. is recovering from last year’s pandemic-induced slump, prices are rising and the job market is healing, April’s disappointing payroll figures notwithstanding. But, just last month, senior policy makers said the time wasn’t right for a conversation about tapering. The minutes nevertheless indicate the subject was raised. The qualifiers attached — “a number of participants”… “might be appropriate” — don’t erase the fact that the narrative is now officially out there. Someone high up signed off on it.
The taper tantrum of 2013 started innocuously enough eight years ago, almost to the day. It produced a reaction in U.S. and global markets that, by the end of that year, had the Fed very slowly winding back the QE introduced in the aftermath of the global financial crisis. By the close of 2014, QE was over. Almost a year later, officials had raised the benchmark interest rate, albeit tentatively.
The U.S. is very far along its recovery, much more so than almost anywhere else in the world. In Asia, a region once considered to have handled the virus well, conditions are deteriorating. India is the current epicenter of the pandemic. New restrictions are in place in Singapore and Taiwan. South Korea has suffered a fresh wave of infections. Japan, whose economy shrank last quarter, has one of the slowest vaccine rollouts in the developed world. Indonesia is vulnerable and Malaysia is said to be on the cusp of a new lockdown. Ideally, some of these countries should be further loosening fiscal and monetary policy, but that’s tough without the Fed going the same way. Higher yields in U.S. will, in theory, lure investors away from emerging markets.
While a gradual taper is still months away and Wednesday’s news didn’t produce a market panic, a sharp reaction to any pronounced slowdown abroad might stay the Fed’s hand. Officials went into 2015 and 2016 predicting multiple rate hikes, only to do one each year. The culprits were weakness in China, stemming in part from a botched effort to revalue the yuan, and the Brexit vote in the U.K. The Fed hiked in December 2018, but began fretting about a slowdown of growth overseas. That was enough to put a pause on further increases and, by late July, it was cutting.
Is it possible that the Fed is withdrawing into a weakening global economy, or at least one less hale than forecast by the International Monetary Fund? Things may get under control in Asia by year-end. Vaccinations, which have lagged behind the U.S., will likely accelerate and health officials may learn more about mutant strains of Covid-19. Whether the U.S. economy, subject of the Fed’s formal mandate from Congress, can wait beyond this time horizon is a separate question. Powell’s domestic priorities and the central bank’s international responsibilities may be in real conflict.
This tantrum may move slowly. If it comes, though, May 19 was the start.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.