The Federal Reserve must end its policy of feeding cheap money into the US and global financial system — its quantitative easing programme — as quickly, but as carefully, as possible.
The US economy has been slowly but surely recovering from the global economic and financial crises. Unemployment, a major indicator of the health of the economy is down, although well short of the reserve bank’s ideal of about 6.5 per cent. Nonetheless, it is confident enough of the sustainability of the recovery to have announced that it will begin easing off the stimulus programme.
The fallout of the announcement was severe for emerging markets, which had benefitted from quantitative easing as investors looked for better returns than were available in the US. Their currencies fell as money moved back into the dollar, sparking dangerous volatility on markets and the risk of inflation.
But the tapering off is necessary. Cheap money, especially when it is not necessary, causes asset and credit bubbles.
This week, the Federal Reserve is expected to indicate how fast it will reduce the stimulus programme. To preserve stability in international markets, it must clearly state by how much it will reduce the programme, now worth $85 billion (Dh312.63 billion) a month, and over what time. This will reduce volatility and opportunities for speculation as investors value transparency. The US and global economy must be weaned off stimulus programmes so that markets and interest rates can get back to normal.