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Taper Trouble

The International Consequences of Fed Policy

U.S. Federal Reserve Chair Janet Yellen testifies on the economy before the Joint Economic Committee on Capitol Hill in Washington, May 7, 2014. Jonathan Ernst / Courtesy Reuters

In April 2013, Ukraine was sporting a massive current account deficit of eight percent, and it badly needed dollars to pay for vital imports. Yet on April 10, President Viktor Yanukovych’s government rejected terms set by the International Monetary Fund (IMF) for a $15 billion financial assistance package, choosing instead to continue financing the gap between its domestic production and its much higher consumption by borrowing dollars privately from abroad. So a week later, Kiev issued a ten-year, $1.25 billion eurobond, which cash-flush foreign investors gobbled up at a 7.5 percent yield.

Everything seemed to be going swimmingly, until May 22, when the U.S. Federal Reserve’s then chair, Ben Bernanke, suggested that the Fed might, if the U.S. economy continued improving, soon begin to pare back, or “taper,” its monthly purchases of U.S. Treasury and mortgage-backed securities. The Fed had begun the purchases the previous September in order to push down

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