Risks related to the Fed’s exit from ultra-easy policy

July 28, 2013

The IMF Article IV consultations for the U.S. suggest that a Federal Reserve exit from unconventional and highly accommodative policy may be challenging. Most importantly, quantitative estimates and past experiences indicate that the term premium on long-dated bond yields can vary greatly and become disruptive for markets and the economy. Meanwhile, the envisaged “passive” rundown of large treasury and MBS holdings would take a long time to unwind the Fed’s bloated and more risky balance sheet. And as long as excess reserves are ample even the Fed’s control over short-term rates will be imperfect.

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U.S. Fed “tapering”: The basics in the FOMC’s own words

July 1, 2013

Envisaged Fed tapering is simply predicated on five principles: (a) balance sheet expansion will slow and ultimately cease if unemployment declines on a sustained basis to around 7%, (b) the pace of asset purchases remains data dependent, hinging on sustained labor market improvement and financial conditions, (c) tapering is not meant to tighten monetary conditions, (d) tapering does not per se lead to subsequent unwinding of Treasury holdings and may never result in MBS sales, and (e) tapering does not per se bring forward Fed fund rate hikes, which are subject to higher thresholds.

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