Fed Struggling With a Monetary Policy Exit Strategy

Tradervox (Dublin) - Last week saw a number of fed officials give speeches around the country talking about the current economic status and hinting on the threshold they expect to before they can abandon the near zero interest rate monetary policy. According to some analysts, the Fed is giving signals at the benchmark it is using to measure economic growth and when it expects to leave the monetary policy.

Ethan Harris, of Bank of America Merrill Lynch indicated that the policy makers are relying on communications about their expectations as a way of adding stimulus to the economy. Their sentiments so far have raised investor confidence and the dollar has advanced against major currencies.

Harris has indicated that the recent round of speeches by Fed officials is seen as a strategy to avert the actual hiking of interest rates and improve investor confidence. He explained that the present scenarios of showing the public how the Fed will react in case of any eventuality are aimed at guiding the market in advance by explaining the reaction function.  This allows the market to react hence averting a possible scenario where the Fed would actually have to change the scenario.

According to the recent sentiments from Fed officials, there is little indication that the Federal Reserve market Committee will change the monetary policy before 2014. The jobless rate still remains well above the Fed’s target of 5 percent at 8.2 percent. Two Fed officials, the New York Fed President William Dudley and the Fed Vice Chairman Janet Yellen, have both supported the monetary policy in their separate speeches last week.

However, the biggest investors in the world still hold the view that the Fed will carry out another round of quantitative easing citing weakening growth and the return of the Europe debt crisis. Speculation about the intention of the Fed to buy home-loan bonds has increased 2012 returns on government backed mortgage debt.

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