How To Talk To Your Family About The Taper Over Thanksgiving

Thanksgiving is two days away so it's about that time when you start fretting about how you talk to your relatives about public affairs. Most people are worried about debates over Obamacare. Wonkblog's Sarah Kliff gives a rundown on how to navigate those. But there's a more pressing issue that is sure to light up dinner table discussion and create all sorts of mayhem: the Fed's taper!

Here's your guide for how to handle those conversations:

What is tapering?

Let's start of with the basics. The Federal Reserve has been using an unconventional monetary policy tool called quantitative easing (QE) to spur economic growth since the Fed has already cut short term rates, the tool it normally uses to fight recession, to zero. This is the third round of QE and has been in place since September of last year when the Fed announced it would buy $40 billion of mortgage-backed securities. In December, it began buying an additional $45 billion of long-term Treasuries. The goal of these asset purchases is to bring down long-term interest rates by removing supply from the market. As the economy has recovered in the past 15 months, the Fed has begun considering when it would start reducing its purchases. That's called tapering.

So, that's what tapering is. Does anyone know when the Fed is going to stop?

Nope. No one knows for sure, not even Ben Bernanke or Janet Yellen.

Back in June, Bernanke announced that if the economy continued improving at a moderate pace, that the taper would happen sometime in the latter half of the year. Over the summer, the recovery slowed slightly, mortgage rates rose and the potential for a government shutdown grew. The Fed surprised the market in September when it postponed the taper.

Right now, no one is certain when the taper will come. Many believe it will happen in March in Janet Yellen's first FOMC meeting as chairman while others believe it will occur in December during Bernanke's final meeting. Much of it will depend on the upcoming economic data, specifically the November jobs report.

Wait, I thought the market has a good read on these things. Why was it so surprised in September?

There are mixed opinions on this. Many blame the Fed's communication strategy and argue that it led the market to believe that a taper was coming in September. Others, including Bernanke himself, think that the Fed followed the baseline policy that it laid out in June. They say that the Fed informed the market that a taper was coming if the underlying economic data continued to come in at a continued pace. Since it came in below that level, it's not surprising that the Fed postponed tapering.

OK got it. I've heard a lot of people argue that QE is going to cause rampant inflation. Is that true? Are we about to see prices skyrocket?

Nope.

Many economists have spent the past few years predicting that inflation is right around the corner. They argue that the Fed has pumped trillions of dollars into the money supply and that this will undoubtedly lead to inflation. Except that hasn't happened.

Inflation has been persistently below the Fed's 2% target the past few years, despite those dire warnings. In fact, some commentators are starting to become more worried about deflation than inflation after CPI came in at just 1.0% year over year rate in October and core CPI, which is prices minus food and energy, came in at 1.7%.

Quite simply, there are no signs that inflation is around the corner.

Alright, that's comforting at least. What about unemployment? Is the economy improving?

Yes, but slowly. The October jobs report, which was distorted a bit by the government shutdown, showed stronger job growth than we have seen in a while. The housing market looks like it is still improving despite rising mortgage rates over the summer. Retail sales and GDP growth both came in above expectations as well. However, expectations have been low so beating them was not difficult. The economy is still recovering at a slow pace and it would be years until we reached full employment.

Well there goes my comfort. Is there anything that can make me feel optimistic?

Well, things could be a lot worse. Just look at Europe. The ECB has been much slower to cut rates and have not used any unconventional tools like the Fed has done with quantitative easing. That has lead to a miserably slow recovery that is still way behind yours.

As for back here, the economy is slowly getting better and it doesn't look we'll have another government shutdown.

If that doesn't cut it for you, then check out Steven Perlberg's guide for how to drink on Thanksgiving. That always makes dinner table arguments much more fun.