Fed needs to back out of stimulus strategy

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Fed needs to back out of stimulus strategy
Oluşturulma Tarihi: Haziran 24, 2009 00:00

WASHINGTON - The U.S. Federal Reserve needs to start planning its exit strategy from its massive stimulus effort even though economic recovery signs remain tentative, analysts say.

At a two-day meeting opening Tuesday, the Federal Open Market Committee, or FOMC, was unlikely to announce any backing away from its stimulative policy, but will probably be making contingency plans, say Fed watchers. "The Fed is cognizant of the need to sop up excess liquidity when the economic recovery gains traction," said Liz Ann Sonders, chief market strategist at Charles Schwab & Co.

Sonders and others point out that the Fed, which has lowered its base rate to near zero and pumped more than $1 trillion into the financial system, must be prepared to act to avert a dangerous inflationary spiral. "Inflation builds partly from fear," she said. "Consumers and investors need to believe that the extraordinarily bold monetary and fiscal policies unleashed during this crisis will be reversed. If they don't believe this, inflation expectations will soar and policymakers will be in a real bind."

Peter Hooper, an economist at Deutsche Bank, said the Fed and chairman Ben Bernanke face a delicate balance in preparing an exit strategy that does not choke off recovery. "Having engaged in unprecedented conventional and unconventional monetary expansion, the Fed's exit problem will be more challenging than usual," he said in a note to clients.

"The exit is already under way in as much as balance sheet expansion associated with the Fed's liquidity facilities has been running in reverse for a number of months now."

Still, the Fed will probably avoid any mention of a reversal, said Scott Brown, chief economist at Raymond James & Associates. "Some say that the Fed needs to start unwinding its accommodative policy now to prevent future inflation. Others suggest that the economy is beginning to recover on its own and doesn't need the large fiscal stimulus and the higher deficits that entails. Such talk is foolish," Brown said. "Federal Reserve officials are confident that monetary policy accommodation can be scaled back in time to prevent inflation from rising too sharply. However, officials are also aware that many financial market participants aren't as confident in the Fed's ability to contain inflation."

The Fed has already embarked on a massive program to purchase up to $1.2 trillion in government and agency debt in an effort to bring down a variety of interest rates it does not control.

Bernanke calls the effort "credit easing" while others call it "quantitative easing." It is aimed at lifting the economy out of its worst crisis in decades.

But a sharp rise in bond yields has raised fears that the recovery could falter despite Fed efforts.
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