Federal Reserve officials mull exit strategies

by Donny Kendal, Staff Writer

The Federal Reserve’s policy of asset purchasing or quantitative easing has been stimulating GDP growth in the U.S, but the QE will have to end eventually with analysts attempting to determine how this will affect the economy.

Since the start of the recession in 2007, Federal Reserve Chairman Ben Bernanke has been traversing an economic tightrope between policies that would spur the economy but not produce a significant wave of inflation. QE is a policy where the Fed buys assets and debt in order to add money to stimulate the economy.

Bernanke says the monetary policy is “providing important support for the recovery.” The policy is keeping interest rates at near-zero levels, which leads to easier loans for houses and automobiles. Bernanke has repeatedly stated that the Fed will continue the QE policy until the labor market recovers “substantially.”

With the Fed balance sheet exceeding $3 trillion, questions are being asked about how to bring QE to an end. The Fed has held interest rates at near-zero levels for four years. Bernanke said near-zero rates could be a risk.

“Low interest rates, if maintained for a considerable time, could impair financial stability,” said Bernanke.

Analysts at MSCI Inc. conducted a study to determine the cost of the Fed’s potential exit from QE. MSCI found that the Fed’s holdings could lose $547 billion in value. This would be the result in a future environment of economic contraction and higher inflation. More optimistic scenarios forecast a $216 billion loss.

Some market analysts do not think an exit from the QE policy will be easy. Euro Pacific Capital President Peter Schiff said the growth of the GDP was a result of the stimulus and that the recovery “will end as soon as the stimulus prop is removed.” Schiff predicts high levels of inflation resulting from the QE policy.

Bernanke, however, is confident the recovery will continue. He also said the Fed would be able to exit QE before inflation becomes a problem.

“Inflation expectations appear well anchored,” said Bernanke.