- Quantitative easing has introduced a new unpredictability to monetary policy
- Its full withdrawal may be difficult, for fiscal and monetary reasons
- The timing and scope of the Fed’s taper of QE could provoke or prevent market turmoil
After years of conducting unconventional monetary policy with ultra-low interest rates and huge asset purchases, the United States Federal Reserve seems headed toward a more conventional stance. The process, called “normalization,” started with the Fed raising its short-term interest rate targets and announcing plans to unwind its giant balance sheet. It is worth considering why and how this major policy shift is happening to determine its likely effects on the economy and markets.