Letters: Fed's bond-buying game

This refers to Jim O'Neill's article "Emerging markets mock the pessimists" (December 4, 2014). The article rightfully captures the zeitgeist of the world economy as we look forward to bid adieu to 2014. The writer makes a point that after halting the easing programme, the US will be in no hurry to put the bonds it had bought back into the market. The main thing for measuring the effectiveness of the easing programme, which the US had undertaken is that the bond purchases by the Fed are to be later absorbed by the private players such as depository and non-depository financial firms, pension funds, insurance companies and so on.

Following an unconventional monetary policy for almost four years since the financial crisis, the Fed had pumped massive liquidity into the system by buying bonds on the expectation that once the economic engine becomes sustainable, the private sector will come forward to purchase them back and deflate its balance sheet. Although the immediate market reaction in October this year to the news of tapering was not as bad as expected, the real test will lie ahead.

In the next couple of years, the economy must be able to go solo so as to prove the effectiveness of the quantitative easing programme. The Fed's bond-buying programme had raised the prices of the bonds but at the same time lowered the yields. Since bond prices and yields move in the opposite direction, the yields will likely go up once the liquidity dries up. The lower yields on bonds meant lower costs of borrowing for businesses to start new economic activities and thereby job creation and creating sustenance. Hence, the problem of rising yield will work exactly opposite and not in the interest of the US economy.

Therefore, the next couple of years will be trying times for the US since it will wait and watch for the right time to bring the bonds back into the market.

Ravindra R Muley, Navi Mumbai

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