The US Federal Reserve’s decision to taper monetary expansion by another $10 billion Wednesday has major ramifications for world markets. In comparison to the total amount being spent on a monthly basis, the taper may seem gradual, but it has created an enormous hole in market demand. To put it in context, $10 billion of debt purchases is more than the average monthly portfolio investments into Turkey, India, Brazil, Indonesia, Thailand, Chile and Ukraine combined. The $20 billion that has already been removed from the market is roughly equivalent to the monthly flows of all those countries plus Mexico and Canada.

The decision brings total US monetary expansion down to $65 billion per month going forward until the next decision to scale down asset purchases in long-term treasuries and mortgage-backed securities. Ongoing purchases will add to an unprecedented $3 trillion growth in the balance sheet of the Federal Reserve since 2008. In the process, the Federal Reserve has played a key role in buoying global capital markets by sending investors who might otherwise have invested in US assets searching elsewhere for a return.

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