The U.S. Federal Reserve Board has released the minutes of the Federal Open Market Committee (FOMC) meeting on June 21-22, 2011. The minutes show that the FOMC outlined a plan of action for exiting its easy monetary policy strategy, including the sale of government securities held on the Fed’s balance sheet. The plan includes detail oriented toward communicating the Fed’s intentions to the public in advance of any action.
The principles of the Fed’s exit strategy in brief are:
- the timing and pace of the exit must be in line with the Fed’s dual objectives of maximum employment and price stability (as if both of those goals require the same policy);
- the initial step would like be a cessation of the reinvestment of principal repayments of the government securities owned by the Fed;
- as usual, the Fed would begin to raise the target on the federal funds rate, but only “when economic conditions warrant” – the Fed gave no indication as to when that might be;
- raising the federal funds rate would be followed by sales of the government securities, and here is where the Fed believes that communication is very important – “The timing
and pace of sales will be communicated to the public
in advance; that pace is anticipated to be relatively
gradual and steady, but it could be adjusted
up or down in response to material changes in the
economic outlook or financial conditions.” - the Fed’s goal is to sell off the government securities it hold over a 3-5 year period;
- as always, changes in economic or financial conditions will affect the exit strategy.
Of course, now is not the time for any action toward an exit strategy, given the general weakness of economic growth in the U.S. In fact, the minutes even included this little nugget, which seems to have some stock market speculators excited: “Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation.” However, considering the ongoing concern over inflation in commodities and the struggle over the federal deficit, no one should seriously expect more quantitative easing without there being some exigent circumstance, like a near-zero or negative GDP number or a serious decline in equities on the magnitude of -20 percent or so.
To view the full FOMC minutes, please click the following link: FOMC Minutes June 21-22, 2011.
Gregg D. Killoren
victoria1014
Higher U.S. Interest Rates Not Necessarily Threat to Economy
Although the Federal Reserve is busy buying Treasury bonds to keep interest rates suppressed and promises to keep its record low federal funds rate at a range between 0 and 0.25 percent “for an extended period,” everyone knows that higher interest rates are coming. However, there seems to be a parallel concern that higher interest rates in the U.S. will derail the economic recovery, or at least be harmful to economic growth. That concern may be misplaced and may cause many investors to make poor decisions in the near future.
Let us begin with the fact that, in the last decade, the Fed held rates too low for too long, sparking a rush among worldwide investors to seek yield in the most unlikely places, such as derivatives like securitized residential mortgages (the Fed, and Alan Greenspan, debate this point, but there should be no question but that the Fed played a role in the factors that caused and contributed to the financial crisis—see “How Government Economic Policies Caused the Financial Crisis of 2008“). This is a prime example showing that the Fed does not control interest rates, it can only seek to influence them, and sometimes the Fed’s actions have unintended consequences.
The McKinsey Global Institute recently explored the matter of U.S. interest rates, specifically identifying five myths, which go to show that higher interest rates may not be as bad as some believe. The five myths outlined by McKinsey are as follows:
Higher interest rates are on their way, so long as the economic recovery continues, and leading indicators certainly point to that fact, as do inflation figures around the world. However, investors should not be scared into making poor decisions about what higher interest rates mean. Rather, they should be looking for ways to take advantage of higher rates.
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Posted in Banking, Central Banks, Federal Reserve Board, Investing, Market Commentary, Monetary Policy, Personal Finance
Tagged Central Banks, Federal Reserve Board, Interest Rates, Investing, Market Commentary, Monetary Policy, Personal Finance, Quantitative Easing