The Year of UnQE

The economy has been getting better and I suspect that will continue. There are obviously going to be surprises along the way, as there always are, but there is no reason to believe current trends will not continue for a while.

The most obvious thing which we expect and plan for, but which will be a bit unpredictable is how the unwinding of the QE program will affect the economy. It is for that reason I suspect we will see it begin when the economic numbers show an upturn of inflation or further decrease in unemployment or a combination of other good results. The question in everyone's minds after that will be how the Fed would want to continue that. Will it be a steady amount every month, the way they put it into place? Will it be less every month to avoid depressing the economy? Will the amount vary from month to month or quarter to quarter?

As this is really the first time they will have done this (to my knowledge) I suspect they will go slowly, either rolling back a smaller amount each time or spacing out the rollbacks -- for example, one every quarter or every other month. This would give them time to look at the effects and to make any necessary adjustments. A small tick up or down in the amount to relate this process to the ups and downs of the economy could be necessary.

Whatever method they choose it should be cautious. The sequester is likely to still be in effect and unless the economy suddenly goes into overdrive we won't be seeing a lot of inflation for a while. And, using the unQE to neutralize inflationary pressures could be very useful to keep everything in balance for a long time.

In short, I believe their method should be slow, with time after acting to observe the effects, and with adjustments to relate to economic performance.