April 21, 2011 Reading Time: < 1 minute

“Previous statements about exits by Fed officials simply listed the tools that could be used in an exit strategy, but did not actually put forth an exit strategy. In contrast, President Plosser describes a specific strategy.

Two things are very attractive about strategy. First, it aims is to return monetary policy to one in which the federal funds rate is determined by the supply and demand for reserves. This of course requires that the Fed bring down the enormous supply of reserve balances on its balance to a level closer to a quantity demanded by banks at a positive interest rate. Reserves were $26 billion on September 10, 2008 when the fund rate was 2 percent just before the panic, which gives an order of magnitude of where reserves should go. Plosser assumes $50 billion, which seems reasonable to me. But reserve balances will be around $1,500 billion by the time QEII is over, so it’s a long way down.” Read more

“A Good Exit Strategy Proposed by Philadelphia Fed President Plosser” 
John B. Taylor 
Wall Street Pit, March 29, 2011. 

Image by Salvatore Vuono / FreeDigitalPhotos.net.

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