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Just in case you were wondering, no exit yet

June 25, 2009

Earlier today the Fed announced that it would extend a number of programs slated to expire this year until February 1, 2010, making it clear for any of the doubters out there that the Fed is not ready to pull the plug on its patchwork of support for financial markets.  It probably would have made a bigger exclamation point if the Fed Board had made the announcement yesterday when the FOMC stood pat on its policy, but no matter.

I had argued earlier this week, that now would be a good time for the Fed to go for the low hanging fruit when it came to an exit strategy and commit to winding down, among its lending facilities, the Commercial Paper Funding Facility when it was due to expire this year. After all it would show that it was committed to the temporary nature of these programs and give those worrying about too much stimulus something to chew on.

I still believe that at some point this will become a credibility issue for the Fed. Investors, especially those overseas, want to know that the U.S. government isn’t planning on inflating its way out of its debt mess. I understand the difficulties of trying to time things just right so you don’t quash an emerging economic recovery by taking away the stimulus too soon.  But, what better test case than a program that is already winding down in an area that U.S. companies, and by extension the economy, has become less reliant on.

The commercial paper market, which froze on two separate occasions in the last two years, is just not what it once was. At $1.15 trillion, it’s nearly half the size it was at it’s peak in 2007. Companies have moved away from relying on it and the economic slowdown means there’s also less need to borrow in this short-term market.

But, policy makers obviously feel the timing still isn’t right.

Update: I should note that the Fed did ditch one program, the Money Market Investor Funding Facility but that doesn’t really count since no on ever used it in the first place. And it trimmed back two other programs.

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