The Fed has pumped the economy with money during the last year and a half, helping to ease the liquidity crisis that gripped the economy in late 2008. However, the Fed has long discussed their exit strategy from this position. The Fed traditionally would sell off the many assets that they have been holding, but economist James Hamilton notes that a sell off would likely result in higher interest rates and a slower recovery. Hamilton makes many very good points in his blog, particularly that the rise in bank reserves, and the selloff in
IOER has played an increasingly important role in the Fed’s toolkit, and looks to be even more important in the future. I would like you to consider the various exit strategies proposed by economists inside and outside the Federal Reserve. Ben Bernanke has stated the FOMC’s ‘official’ position, but other economists have had other opinions. The KC Fed’s Tom Hoenig has pointed out the problems with the current Fed stance, and is calling for a faster removal of stimulus relative to the Fed’s current official position.
Questions you might try to answer:
- Consider the proposed exit strategies of the Federal Reserve.
- What are the possible unintended consequences of the proposed exit strategies.
- If you have examined another exit strategy, why would it result in an improved outcome over the Fed’s strategy?