Today the Fed announced the beginning of the end of QE, aka “Taper”. I applaud this move. One key ingredient we need to return to “normal” is a market-based interest rate. Interest rates ration money to the most productive projects by raising the hurdle rate. The Quantitative Easing bond-buying program has served to artificially depress lending rates and spur economic activity. As economic activity accelerates, the Fed needs to allow interest rates to normalize and resume the role of pricing money to avoid capacity constraints and ensuing inflation. If economic activity remains weak, then demand for money will be weak and rates will stay low anyway (albeit maybe not on the floor).

I don’t get the sense that there’s a lot of lending activity outside of mortgages that will be stifled if rates drift back to the range of historical norms. As long as economic activity continues its slog to normal, I see the long-awaited tapering as welcome confirmation that recovery is intact.