The Fed's Exit StrategyApril 01, 2010 Posted by: Minh Trang
In response to the severe market disruption to the economy two years ago, the Federal Reserve created multiple liquidity programs aimed at stabilizing the financial system. Since then, market conditions have improved and the Fed is now tasked with implementing a strategy to normalize monetary policy that accommodates a stable economic recovery. The purpose of this strategy is to prevent a flare-up in inflation and to neutralize any potential undesired financial imbalances created by the “extended” accommodative policy.
The Fed has already taken a few steps to adjust its monetary activities. In February, the Fed raised the discount rate by 0.25 percent to 0.75 percent. In addition, several of its liquidity programs have expired or been phased out. These include ending the purchase programs for $1.25 trillion in agency mortgage-back securities, $175 billion in agency debt and the term lending facilities, which allowed short-term borrowing for depository institutions from the Fed.In addition to targeting its overnight benchmark rate, the Fed has outlined several other tools as part of the exit strategy to reduce excess liquidity.