A Less Risky Fed Exit Strategy
Posted at 1 p.m. on Feb. 27
As the Federal Reserve has launched successive quantitative easing programs and conducted significant asset purchases to prop up the US economy, there has been considerable hand-wringing over how the central bank will sell off these assets once the economy recovers. But there is a less risky exit strategy available, says Walter Kurtz.
“Back in 2009 the Fed set up tri-party repo arrangements with a number of dealers… Eventually that will allow the central bank to lend out the securities instead of selling them. As dealers borrow the securities over a period of a week for example, they post cash as collateral to the Fed… That cash going into the repo account is taken out of ‘circulation’, thus draining the reserves.”
“In effect the Fed would sterilize some or all of its securities purchases. Which means that draining the reserves does not have to entail the painful process of active portfolio unwind.”