It seems that once again the concept of quantitative easing is misunderstood. The newest mantra that the Fed and some analysts are trying to sell you is that taper isn't tightening. Well it is. People who try to tell you that have a fundamental misunderstanding of what quantitative easing is and how it ultimately impacts the markets.
In fact the misunderstanding goes back to the fateful day when Ben Bernanke pulled the trigger and actually pulled the QE card. Interest rates were already at zero so QE was supposed to make interest rates in an esoteric way go negative. Now the degree of negativity of course should be akin to the amount of bond and mortgage-backed securities that the Fed bought, which currently stand at $85 billion per month. Right after QE was announced I immediately said that the Fed just printed a floor under commodities.
Yet it took a while for people to catch on to that. I remember one article where I was blasted for saying the QE would increase the price of oil. Or that Fed policy would control the commodity markets. Some that I told that to looked at me like I was from outer space, but now QE and the terms risk-on/risk-off have became common market talk.
Now it comes to the taper. As soon as I heard Ben Bernanke mention taper in his testimony before Congress after dovish talking points were released to the Press, I knew the Fed was trying to begin a tightening policy by telling us it was not tightening. I called him the one-handed Fed Chairman because on one hand he was telling us they would not tighten yet he was going to start tapering back bond purchases.
The markets did not buy it. They knew they had been had and the sudden spike in yields was proof positive that tapering is a form of tightening. In a world of negative interest rates, the way you either juice the economy or slow it down is by adjusting the amount of bond purchase. Increase the amount and it is like cutting rates further into negative territory, cut back purchases and rates go up.
And if it is not tightening, then what is the big deal? Why did the Fed chicken out the last time they said they were going to taper? Of sure tapering may not be tightening in a traditional sense because it may not impact your car loan rate for example, yet is sure can impact the banks wiliness to make that loan. The other thing is that when you are in a QE environment, you are not in a traditional market in the first place.
When you are in the shadowy world of negative interest rates, it may be hard to determine just how negative rates really are, but you can't deny they are negative. This is not to say that even if we taper the Fed is not still being wildly accommodative. They are just not as wildly accommodative as they were before.
Anyone who says that tapering is not tightening can see the rates as below zero, they think rates end at zero and the world is flat and then you just fall off of the edge. When you are in a world of QE and negative rates, you have to analyze things in a more abstruse and almost mystical way. Yet wherever you are in real terms of negativity on rates, less bond buying is tightening. You can argue impact but you can't argue its tightening. Anything less negative is a positive.