What is the Fed's exit strategy? Has it changed over time? Will it work? Are the size of mutual funds a problem? Explain.
There was an answer with this question, but it's out of date (answer from 2014). Could you give me a more current and up-to-date answer to this question?
Here is the 2014 version answer just in case:
The current exit strategy is assets sales after policy rate hikes. In 2011, it was asset sales before policy rate hikes. Short-term forward guidance would have to be changed ("considerable period") both before the first policy rate hike and the long term "long for long" pledge would have to be modified as well. The balance sheet will be large for a very long time, increasing the chancing of an asset bubble or price inflation developing. No one knows for sure if it will work. Yes, the size of mutual funds is a problem as they may be prone to fire sales in a replay of the summer of 2013. So leverage might not be the big problem once rates rise.
The current exit strategy is shrinking the FED's balance sheet since government went into an aggressive purchase of large... View the full answer
- All the best in your studies
- May 14, 2018 at 5:16am