Fed May Overhaul Plan to Exit Stimulus

As balance sheet gets bigger, the risks in unwinding it increase.

A decision by the Federal Reserve to expand its bond buying next week is likely to prompt policy makers to rewrite their 18-month-old blueprint for an exit from record monetary stimulus.

Under the exit strategy, the Fed would start selling bonds in mid-2015 in a bid to return its holdings to pre-crisis proportions in two to three years. An accelerated buildup of assets would also mean a faster pace of sales when the time comes to exit -- increasing the risk that a jump in interest rates would crush the economic recovery.

Holdings Expand

The central bank’s holdings expanded during the financial crisis as the Fed created several emergency loan programs. Chairman Ben S. Bernanke in November 2008 ordered the purchase of debt issued by housing agencies and mortgage-backed securities in a strategy that he called credit easing.

Long Exit

“The exit is going to take a long time,” said Stephen Oliner, a resident scholar at the American Enterprise Institute in Washington and former Fed Board senior adviser. He estimates the Fed’s holdings could rise to more than $4 trillion.

Draining Reserves

“I’m not sure we’ll really know, until they undertake a real program, what the effectiveness is” of such measures, said Bank of America’s Hanson. “The amount of reserves could be so large that the draining doesn’t do a whole lot.”

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