With the US Federal Reserve finally announcing it will start scaling back its quantitative easing (QE) measures next year, including its US$85 billion monthly bond-buying program, months of intense discussions within the Fed has ended, which has eased uncertainty in the market and regained a certain degree of credibility for the US central bank in the eyes of the public.
The policy statement issued by the latest Federal Open Market Committee (FOMC) meeting on Wednesday showed that federal policymakers will commence QE easing in January by lowering its asset purchases by US$10 billion per month to US$75 billion. In particular, the Fed will reduce its asset purchases of mortgage-backed securities to US$35 billion from US$40 billion each month and lower that of the longer-term Treasury securities to US$40 billion from US$45 billion.
The Fed’s long-anticipated move to wind down its bond-buying program suggests that the US central bank has seen encouraging signs from the US economy, with the latest economic data showing further improvement in US labor market conditions last month, while a 4.1 percent annual growth rate in GDP in the third quarter was an improvement from a 2.5 percent expansion rate in the second quarter. However, it does not mean the world will see much relief from the long-awaited taper.
The Fed on Wednesday reaffirmed that its current low interest rate stance will remain for a considerable period of time. The prospect of fund outflows has weighed on most Asian currencies in the past two sessions, as investors were expecting growing demand for US dollar-denominated assets. Although Asian stock markets have presented mixed reactions thus far, it means that investors were still scrutinizing the positive and negative impacts of the Fed action. Similar monetary easing measures adopted by central banks in the US, Japan and Europe over the past few years have created ample liquidity and generated a property-market boom in Asia’s emerging economies. With the eventual normalization of developed economies’ monetary policies, the property sector in emerging markets, including Taiwan’s, should be cautious about how long it will take for a liquidity crunch to kick in.
Regional central banks in Asia have in recent years introduced various measures to counter the negative repercussions of hot money on their economies. Ironically, they may now be pondering what tools they have at their disposal to buffer fund outflows and stabilize their markets.
For Taiwan, policymakers should take action to direct funds from the sizzling property market into other parts of the economy, including the stock market. It has been a mild year for the stock market, with turnover only improving slightly from last year. The government should address the light transaction volume issue by providing more market-friendly policies next year.
A boost to Taiwanese market confidence after the Fed’s move will come down to the nation’s economic fundamentals. This will demand that the government lay out plans to direct funds into production in the real economy.
The global economy is set to recover next year from this year, but it is uncertain whether Taiwan can effectively keep pace with other economies. The key question is whether our policymakers have effective monetary and fiscal policies in hand, and how they would execute their policies to address the nation’s challenges and lift it out of its economic worries.