The Fed’s Exit Strategy
The Federal Reserve finally addresses how it plans to unwind trillions in toxic assets
Finally, we hear from the Federal Reserve about how they plan to unwind the billions of dollars of toxic assets they purchased over the last 18 months or so without creating further distortions in the U.S. and world financial markets (Fed lays out exit detail). This after the Fed barely acknowledged one of the most dramatic runups in the money supply in U.S. history.
Brian Sack, EVP Markets Group, Federal Reserve
In earlier posts I wondered aloud how the Fed might accomplish this tricky task. It is a very delicate balance between reducing the money supply too quickly, which would spike short term rates, and too slowly, which would increase long-term rates due to worries about inflation (which occurs when money growth is higher than the economy’s real growth, even if money growth is falling).
The Fed, the article explains, apparently intends to let $200 billion of the estimated $1.25 trillion in new money supply simply “mature” by the end of 2011 without replacing it. This represents largely toxic assets. The Fed might let another $140 billion of Treasuries it purchased during normal open market operations mature at the end of 2011, but they aren’t committing to that. So that’s about $340/$1,250 or about 35% of the historic increase in money supply that may be vaporized over the next 21 months. What about the rest? It would be nice to know but….
The Fed is doing the right thing by explaining its policy intentions — ANY of its policy intentions — to the markets. Markets want, need, and deserve information from our officials, something that has been sorely lacking of late. With information, lenders and borrowers can plan, they can optimize. Without information, guessing, withdrawing from the market, and fear rule the day. Not a good environment for economic recovery.
by Sherry Jarrell
Paul Handover
You are right about the FED explaining its policies to people so that market tensions can ease. Nothing scares investors more than the possibility of inflation and the increasing consumption of toxic assets by the government.
yinvestor
March 18, 2010 at 00:16
Inflation can be controlled, deflation cannot. Ergo, the ECB 2% inflation target is too low. 4% would be safer.
There is a guaranteed inflation in some indispensable commodities. Rewarding advancing technology with a higher inflation is therefore a must, so that the world does not die of old age.(As it did in Roman times.)
PA
Patrice Ayme
March 18, 2010 at 15:26
[...] Ben Bernanke, Chairman of the U.S. Federal Reserve, announced that the Fed was likely to begin to sell some of the $1 trillion in mortgages, the so-called “toxic assets,” that it purchased over the last fifteen months to help stave off a total credit market meltdown. Those purchases essentially doubled the U.S. money supply, igniting fears of potential inflation should the underlying real economy recover before the money supply could be drawn back down. See earlier post. [...]
Unwinding $1 trillion in Toxic Assets « Learning from Dogs
March 29, 2010 at 00:03