What to Make of the Fed’s Planned Exit Strategy….

It turns out that Thursday’s market scare over a Jon Hilsenrath “Fed exit strategy” article wasn’t just hot air.  Hilsenrath, widely acknowledged as the Fed’s inside man, wrote an important piece over the weekend that discussed how the Fed is beginning to map their potential exit strategy.

We need to be careful about overreacting to this piece.  After all, it’s not the beginning of the exit strategy – more like a feeler to see how the market will respond to the concept.  In other words, the Fed is starting to feed the market some clues about how the unwinding of QE might take place, but they’re not saying the unwind is set to begin.  Here’s the key paragraph from the article:

“Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.”

In other words, this isn’t even something that’s on the calendar yet.  As I mentioned last week, the timeframe for Fed easing is still far out into the future and I don’t think this changes anything.  The Fed is starting to float feelers into the market to set expectations.  That’s all.  The Bernanke Fed has been excellent at communicating future policy with the markets.  And I think this is another clear message that screams:

“Do not panic, but we’re considering the eventual exit strategy from QE.  But it’s also not something we’re planning to implement in the near future!”

I’ve given the Bernanke Fed a lot of trouble over QE, but communication is one thing no one can criticize them for.  And this message appears very clear….


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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • LVG

    The Fed has basically guaranteed us that they’ll be late to tighten policy. And a reactive policy approach is about the only thing we can be sure of from the Fed.

  • Dexter Bland

    “Do not panic, but we’re considering the eventual exit strategy from QE. But it’s also not something we’re planning to implement in the near future!”

    Yes there’s time for one last drink at the bar, gather our belongings then make our way ever so calmly towards the exits. I mean its not like this parabolic rally was based on the Fed supporting markets through QE for *eternity*, was it?

  • Anonymous

    No, the current rally is supported by an ongoing, unprecedentedly strong recovery in the U.S. housing market, which followed the biggest housing sector bust of the last 80 years.

    The housing sector recovery has just started and will likely continue for 5 more years. The housing sector is the strongest component of the business cycle.

    Fed QA is a minor factor in comparison to housing – but the possibility of exiting the liquidity trap is a gold price negative for sure. The exact opposite of hyperinflation is happening.

  • SS

    Cullen, what would make you worry about recession and get really bearish?

  • LRM

    As operation taper (OT) starts to be implemented, we will then see the doves on CNBC explaining MR and how the QE/LSAP was just a psychological transfer mechanism that had no real way of changing the underlying economy. They will thank the large hedge funds for responding like Pavlov’s dog and ask them nicely to stay on the leash where they were always but forgot when the bowl was filled with kibble.

    If required there will be a couple of large yanks on the chain to remind them regarding who is running the show.
    Meanwhile let the small investor stay in line for the next haircut as the barber is occupied sharpening his scissors. Their e-mail notice will come at a later date so as not to crash the party.

  • Up side Down

    @ Anonymous

    Check out this link re housing by Reuters:


    I think you’ll find it’s far from a sustainable boom given Reuters note that:

    “These big investors and a handful of others have bought at least 55,000 single-family homes across the U.S. in the past year…..(but) the combination of rising acquisition costs, prolonged rental lead times and declining rental income is disrupting the spread-sheet analysis behind Wall Street’s bet. That could pose problems for what once seemed like a slam dunk.”

  • jt26

    Fluffy article.
    No hint of what asset purchases will be curtailed first.
    Found it interesting that the Fed places more emphasis on inflation expectations than measured current inflation … seems wrong since the fwd expectations is a product of 1 variable manipulated by the Fed and the other by financial institutions. Regular Joe’s use the current value of inflation (prices paid; wages received) and assume it will be the same in the future.

    Aside: I liked Adam Posen’s (former BoE MPC) frank admission of what monetary policy is trying to accomplish
    “Actually, 4) induce reallocation of private investment towards riskier asset; 5) directly address spreads”

    No mention of that from the Fed … ;-}

  • jt26

    PS “Fluffy article.” -> Hilsenrath’s

  • Anonymous

    The Fed is beginning to panic as it’s moronic zero bound interest rate policy and inappropriate bond purchases has created a global dollar bubble and the implications could be catastrophic. If the Fed does not back off, and the international arena does not get its act together, there could be an uncontrollable melt up. If they do back off, rates rise and the banks blow up. The Fed is not in control of the global economy.

  • GreenAB

    while i agree that they might not act in the near future, this article is a HUGE signal and it will have a substantial EFFECT on the FORWARD looking market.

    remember – the low yields we´re enjoying are the result of massive frontrunning in the treasury market, market participants trying to flip bonds to the fed.

    the fact alone that they consider scaling back purchases brings an amount of uncertainty. not only will prospective buyers be more reluctant, but some will even consider selling.

    nobody wants to get caught last, even if the actual tightening event might be months away.

    i expect a violent move in the near term above 2% or maybe 2.50% and i wouldn´t be surprised to see them leak some kind of backpaddeling to calm markets down.

    there´s no way around some pain that the feds exit brings along. the critical part is will it be a sudden or slow move towards “normal” real rates?

  • Anonymous

    Not convinced – see Calculated Risk for backing data.

    CR is unique in that he predicted both the housing crash and the current housing recovery correctly.

  • Kristian Blom

    On a directly related note: Rosenberg has “called the end of the Bond Bull Market”. His thesis is wage pull inflation is coming.

    Here is part of the story why that is unlikely to occur and we are not really seeing it on the horizon:


    Would love to hear Cullen’s and others hypothesis on this issue.


  • Boston Larry

    @Kristian, I don’t know the answer to your question to Cullen, but IMO wage pull inflation is unlikely and if it occurs at all, I think it would develop rather slowly in the current slow growth environment.

    Do you know if Rosenberg has also turned bullish on stocks? Thanks

  • Kristian Blom

    I don’t know his opinion on Equities. I don’t see the dynamics which would be necessary to start the process of anything but Central Bank induced bouts of asset inflation.

    Rosenberg is most likely coming at it from the asset gathering angle and as such it pays to make splashy calls: 50% chance of being right and pulling in a lot more assets, 50% chance of being wrong coupled with low odds of losing a significant number of assets unless you are repeatedly wrong and performance goes with it.