Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

The decision to change nothing unleashed a frenzy of interpretation not about the likelihood of tapering but about why it had not happened. Were the doves on the Fed board resisting an interest rate shock? Had Bernanke got cold feet? Was he kicking the can down the road for his successor to deal with?35 Or was the Fed consistent in its policy, but bad at forecasting? Between the spring of 2013, when it began to think about tapering, and September, when it decided to postpone it, the Fed had adjusted its forecast for economic growth sharply downward.36 If the economy was recovering less strongly than expected, this would rescue the Fed’s reputation as a consistent policy maker, but at the price of undermining confidence in its forecasts and highlighting the downturn in expectations. Or was the Fed neither cowardly nor a bad forecaster? Was it playing a subtle tactical game? If it was committed to ensuring that the US economy completed its slow recovery without interruption from a premature and violent increase in rates, it needed to know how severely bond markets would react to a reduction in monetary stimulus. The evidence of the taper tantrum in June 2013 was clear. The markets were impatient. Investors would rapidly tighten credit conditions on any hint of movement by the Fed. If the Fed believed that what was necessary was something more gradual, then after the initial tapering announcements in May and June, it needed to shock markets a third time in the opposite direct...