Federal Reserve Chairwomen Janet Yellen has stated that the Fed may reconsider its cuts to the quantitative easing program if the U.S. economy continues to remain weak. Ms. Yellen has said, however, that America’s weak economy could be due more to the exceptionally harsh winter, rather than any fundamental weaknesses in the economy.

Janet Yellen

The Fed last cut the quantitative easing program in January, trimming it by $10 billion dollars to $65 billion. So far, the Fed has been indicating that it will continue to taper the program, but the recent words by Yellen suggest that the Fed may be cautious moving forward.

Quantitative easing program has global implications

The Fed’s quantitative easing program is widely watched by central banks across the world. Through quantitative easing, the Federal government creates huge sums of new money. Essentially, the Fed creates money and then buys assets, such as bonds. This, in turn, injects more money into the money supply, which increases liquidity and artificially suppresses the dollar.

Increased liquidity and a suppressed dollar makes it easier for central banks and companies across the world to take out loans in dollars. Increased lending in developing country and a cheap U.S. dollar has encouraged many foreign companies to take out loans in order to fuel expansions and investments.

As the Fed rolls back its stimulus package, however, the amount of money flowing into emerging markets will dry up. This could cause a lot of pain for countries such as Indonesia and India, which have been relying on access to cheap dollars. This, in turn, could cause economy growth across the world to slow, and could cause considerable amounts of pain in some markets.

For this reason, the Fed and its moves have been closely followed by traders and policy makers around the world. Stock markets across emerging Asia have been increasingly turbulent in recent months, largely due to the Fed’s plans. If the Fed were to hold off on tapering, many emerging markets would likely see a boost.

Future tapering will depend on the strength of the economy

Tapering could restrain economic growth in the short term, but most analysts agree that the program cannot be sustained forever. The Fed had planned to aggressively cut back its tapering program this year, but recent poor jobs reports and a potentially weakening economy could cool off tapering efforts.

As the Fed tapers its quantitative easing program, liquidity will decrease and companies will not have as much access to cash. This can result in less investment and slower spending. Indeed, retail sales fell by .4% and industrial production slid by .3% since February 13th.

Yellen reiterates strength of economy

Yellen reiterated, however, that the U.S. economy is strong and she expects it continue to grow. Ms. Yellen also pointed out that a longer than usual winter is likely constraining spending, but the extent of such constraint remains unknown.