Economic Commentaries

Entries for September 2013

27

The Federal Reserve's open market committee is soon to meet amidst widespread expectations that the FOMC will agree to reduce the size of its asset purchase program. The only question seems to be by how much. Consensus expectations are currently for about $10-$20 billion with no guarantee that furthers reductions will occur in the future.

There is no question but that the Fed is seeking a graceful exit strategy from its asset purchase program. Chairman Bernanke was the architect of the program and as he prepares to step aside, he would like to begin winding it down before he leaves. There is also considerable research within the Fed that questions the effectiveness of the program. Additionally many argue that the program has created market distortions. Also, given the degree to which the Federal budget deficit is falling, the Fed's purchases of some $40 billion treasuries per month is drying up the supply of new issuance. Finally, both the financial markets and Wall Street analysts have basically given the Fed the green light to proceed.

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