Fed Focuses on Its Exit
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The Federal Reserve released the much-anticipated minutes of the April 26-27, 2011 FOMC meeting which saw the Fed leave interest rates unchanged, but acknowledge higher inflation. The minutes revealed the FOMC spent considerable time discussing its exit strategy.
The Fed said tightening measures would include raising interest rates and selling assets. In addition, ending the reinvestment of payments of principal on securities held would be seen as a tightening measure.
Nearly all FOMC members indicated the first step toward normalization should be ceasing to reinvest payments of principal on agency securities and, simultaneously or soon after, ceasing to reinvest principal payments on Treasury securities.
A majority of Fed members agreed that once asset sales became appropriate, sales should be put on a largely predetermined and preannounced path -- although the pace of sales could be adjusted in response to material changes in the economic outlook. Other participants believe the pace of sales could be a key policy tool and be varied actively in response to changes in the outlook.
Most participants preferred sales of agency securities after the first increase in the FOMC's target for short-term interest rates, and many of those participants also expressed a preference that sales proceed relatively gradually, returning the System Open Market Account composition to all Treasury securities over perhaps five years.
The FOMC agreed that more discussion on an exit strategy is needed and no decisions regarding the strategy were made at the meeting.
QE2, the current $600 billion bond buying program, is scheduled to end on June 30, 2011.
The Fed said tightening measures would include raising interest rates and selling assets. In addition, ending the reinvestment of payments of principal on securities held would be seen as a tightening measure.
Nearly all FOMC members indicated the first step toward normalization should be ceasing to reinvest payments of principal on agency securities and, simultaneously or soon after, ceasing to reinvest principal payments on Treasury securities.
A majority of Fed members agreed that once asset sales became appropriate, sales should be put on a largely predetermined and preannounced path -- although the pace of sales could be adjusted in response to material changes in the economic outlook. Other participants believe the pace of sales could be a key policy tool and be varied actively in response to changes in the outlook.
Most participants preferred sales of agency securities after the first increase in the FOMC's target for short-term interest rates, and many of those participants also expressed a preference that sales proceed relatively gradually, returning the System Open Market Account composition to all Treasury securities over perhaps five years.
The FOMC agreed that more discussion on an exit strategy is needed and no decisions regarding the strategy were made at the meeting.
QE2, the current $600 billion bond buying program, is scheduled to end on June 30, 2011.
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