An exit strategy for the Fed

We have all the tools we need to achieve a smooth and effective exit at the appropriate time.

Ben Bernanke, Semiannual Monetary Policy Report to the Congress, March 1, 2011

Friday’s decent jobs report and accompanying hawkish cacophony have encouraged further talk about when the Fed will raise rates and revert to a place called normalcy.
But what of the how?
In a research note out Thursday, Credit Suisse’s Neal Soss and Dana Saporta look at the tools the Fed can use as it totters along “a long and winding road” back to “normalisation”. (If anyone remembers what that looks like, please let us know.)

here is an exit chronology the authors tentatively propose:

Q2-2011 – Fed completes $600bn large-scale asset purchase program (QE2)
Q4-2011/Q1-2012 – Fed suspends reinvestments of MBS and Agency debt proceeds, allowing for passive balance sheet shrinkage; FOMC alters “extended period” language
Q1-2012/Q2-2012–- Fed neutralizes significant fractions of excess reserves via large term reverse RPs and term deposit accounts
Q3-2012/Q4-2012 – Fed initiates hikes in IOR and in its target range for the fed funds rate
Q1-2013 – Fed begins selling MBS and perhaps Agency debt securities
Late 2013 – Fed considers selling Treasuries

ολόκληρο 

Some economic statistics have been weaker than expected lately, leading to speculation the recovery was faltering. The job numbers provide at least mild evidence that is not so. But this news does not indicate that the economy is in any shape to withstand a significant tightening of either fiscal or monetary policy.

Floyd Norris