Today, we got a look at the minutes from the Federal Reserve’s last meeting, and with them, a clue as to the fate of the Fed's program that has been buying $85 billion worth of bonds and mortgage-backed securities every month in order to boost the economy.
Fed policymakers say that, while growth has been a bit weaker than they expected, it is still good enough for them to start trimming those purchases in coming months. That much-awaited trimming has come to be called “the taper,” and when it finally arrives, the stakes are going to be high.
If you want to learn about how to taper, talk to Tom Comeau, who owns and operates Michael Thomas Clothiers in Washington. He’s been in the clothing business for more than 35 years. And while the Fed will taper what’s known as “quantitative easing,” or QE3, Comeau tapers pants – that’s wide around the thigh, narrow at the ankle.
“Your hand has to be very skilled,” he says, as he turns a pair of slacks inside out to show the stitching. If you aren’t skilled, if you cut off too much fabric, you could ruin the pants. If the Fed cuts back too much, the economy could suffer. Comeau knows when to stop, because he has done this a thousand times before, but the Fed doesn’t have much experience tapering.
“It is definitely learning by doing,” says Justin Wolfers, a professor of economics and public policy at the University of Michigan and a senior fellow at The Brookings Institution. “And it’s going to be a process of experimenting, and I think that is one of the reasons the taper is going to be so gradual.”
According to Kevin Jacques, the Boynton D. Murch Chair in Finance at Baldwin Wallace University, timing is very important when you’re tapering a bond-buying program.
“As the Fed undertakes this, it has to gauge how the economy is going to respond, and how financial markets are going to respond,” he says.
Ditto for Kathy Shaw, who owns the Beeswax Candle Company in Lynchburg, Va., where she hand dips tapered candles. Standing near a melting machine that contains 100 pounds of beeswax, she explains that timing is everything for her kind of tapering, too.
“If you try to accelerate the process, if you try to dip it too quickly, you’re going to wash away all the wax that you’ve established,” she says.
According to Shaw, you have to allow the candles to cool for three minutes in between each dip. But this is more art than science. She warms the wax to about 160 degrees.
“If you have it too hot, it won’t stick to the wick,” Shaw explains. “And if it’s too cool, it will get very lumpy. So we hope for the perfect temperature.”
She is worried about getting the temperature just right. For the Fed, it’s about buying just the right amount of bonds. If it doesn’t, according to Jacques, “the economy could slow down.”
“Mortgage rates could go up,” he continues. “It could have an adverse effect on the stock market and financial wealth.”
On top of that, consumption could go down, which could be way worse for our two taper-ers than a broken candle or a botched pair of pants.