Federal Reserve Board generals have underlined that they indeed possess an exit strategy for their ongoing extraordinary easing program. Such confident rhetoric regarding an escape plan indeed helps to boost the morale of many economic and political observers of marketplace battlefields. Didn’t its entrance strategy work? The Fed Funds rate has stayed near the ground floor since late 2008, United States Treasury yields have collapsed relative to their 2007 heights, and US equities (use the S+P 500 as a signpost) have soared from their March 2009 abyss.
Yet marketplace combatants should be wary of the Fed’s exit strategy design as well as its tactical implementation. It is not a detailed and finished blueprint. In actual practice, the exit strategy involves significant risk, and it probably will not be put into practice nearly as timely or smoothly as propaganda from the Fed leadership hints. How rapid, coherent, and helpful were the Fed’s policy viewpoints and actions in the early stages of the worldwide economic crisis? As the Fed’s marketplace entrance strategy and maneuvers were very remarkable and evolved over time, why should its exit plan and its application be any more “orderly”?
Yet why should the Fed’s exit strategy be without some significant pain to UST and stock owners? There’s at least a significant risk of notable wounds. After all, the rally in debt and equity prices assisted by the Fed’s massive marketplace easing generally enriched and thus pleased owners of American stocks and UST (and many other debt instruments). Besides, we know the noble Fed is not the only significant policy maker and fighter on the US (and international) economic battlefield. Thus its practical control over marketplace outcomes has significant limits.
To what extent is the Fed Chairman accurate? Is the Fed Chairman trying to minimize the role of the Fed in financing (money printing for) the deficit and to understate potential overall exit strategy issues?
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Federal Reserve Exit Strategies (2-21-13)