FOMC lays out exit strategy

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The WSJ’s incomparable Jon Hilsenrath has the scoop on the FOMC’s exit strategy. It looks like Bullard has won the debate – the Fed will move their bond buying up and down with the data, just as they might have done with rates if policy was being conducted in conventional terms.

It therefore seems that the market read too much into the following paragraph of their 1 May statement(my emphasis):

The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

In the light of Jon’s story, it now looks like the edit was intended to lay the groundwork for a more active approach to balance sheet policies, and was not necessarily supposed to indicate the further easing was imminent (though the potential for further easing was new-news, so a modest rally was in order).

Anyhow, over to Jon …

Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations.

Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.

The Fed’s strategy for how and when to wind down the program is of intense interest in financial markets. While the strategy being debated leaves the Fed plenty of flexibility, it might not be the clear and steady path markets expect based on past experience.

Officials are focusing on clarifying the strategy so markets don’t overreact about their next moves.

Charles Plosser, president of the Philadelphia Fed, said in an interview Friday that the change in the statement was meant “to remind everybody” that the Fed has “a dial that can move either way.”

The dial can also pause. Fed officials could shrink the size of their purchases and hold it at that level for a while as they assess the effects, or they could make several moves in a row if that seemed right. They could also boost their buying if they lose confidence about the economic outlook. The strategy is meant in part to ensure flexibility in an uncertain economy.

Yet while officials appear increasingly settled on a strategy for how to dial back the program, they haven’t decided when to start.

Central bank officials want to see substantial improvements in the job-market outlook before the programs are ended all together. And then, efforts to boost short-term interest rates might not occur for months or even years later.

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