Federal Reserve Can’t Be To Quick On Exit Strategy
The Federal Reserve will have to walk a fine line in determining when to start it’s exit strategy as the economy starts to improve. For the most part the recession is pretty much over but the recovery phase could be a long and arduous road.
Currently the Fed’s balance sheet is at over $2 trillion and as economic growth starts to return many investors are worried about the inflation implications, while at the same time concerned they might shutoff the tap to credit markets too soon. The banking sector still has a ways to go before it can stand on it’s own and the housing market is slowly improving.
The Fed still plans to buy more mortgage backed securities(MBS) and their efforts to keep mortgage rates low has started to payoff with increased sales activity in the housing market in recent months. Private investment has been slow to return in the MBS market and right now the Fed is the major buyer of these securities, which facilitate banks in turning over loans and extending more credit.
The announcement that Chairman Bernanke is up for another term of office, eases some investor’s minds as now they don’t have to worry about conflicting monetary policies if another person had been tabbed for the post. The consensus is that the Fed already has an exit strategy in place but like everything it’s all about the timing.
The belief is that the Fed would like to keep rates at near zero through the end of the year as the labor situation is expected to worsen at least as long. Consumer spending will be slow to return and it’s been the combination of both the government’s fiscal and monetary spending that has brought the economy out of the current recession.
Economic growth will likely be slow for an extended period of time so the Fed won’t have to act in a rush to shrink it’s balance sheet when the time comes.
