Fed Officials Weighing ‘Exit Strategy’ for End of Recession
The Federal Reserve’s efforts to bolster credit markets and revive growth pose a long-term risk of provoking inflation and worsening other problems that must be solved quickly when the crisis wanes, Fed policy makers said.
Central bank officials, after cutting interest rates almost to zero and more than doubling Fed assets to $1.9 trillion, should design an “exit strategy” that will enable them to steadily reduce credit, Philadelphia Fed President Charles Plosser said yesterday. He spoke at a New York conference that included economists and five other Fed district bank presidents.
The Fed, already facing congressional criticism for invoking emergency power to expand its balance sheet, may face political pressure to keep interest rates low and credit abundant when economic growth resumes, Plosser said. Inflation may surge unless the Fed can withdraw monetary stimulus in a timely manner and fulfill its mandate to keep prices stable, he said.
“It is difficult to make credible commitments to price stability when the implementation of policy is disconnected from such an important policy objective,” Plosser said. “The absence of an exit strategy, or an entrance strategy, creates uncertainty.”