Comments on: Fed sets out exit strategy http://blogs.reuters.com/great-debate/2009/03/26/fed-sets-out-exit-strategy/ Wed, 19 Jun 2013 18:39:45 +0000 hourly 1 http://wordpress.org/?v=3.4.2 By: Michio Suginoo http://blogs.reuters.com/great-debate/2009/03/26/fed-sets-out-exit-strategy/comment-page-1/#comment-11227 Michio Suginoo Fri, 27 Mar 2009 20:06:49 +0000 http://blogs.reuters.com/great-debate/?p=2661#comment-11227 Dear Sir I understood from your article that FED is planning to reduce liquidity by selling long-term debt type instruments. Please correct me if my understanding is wrong. If so, what if no one wants to buy such instrument at the very moment when FED wants to step in to absorb liquidity? Here is a possible scenario: FED faces a political pressure to maintain interest rate at low level simply because of the natural fear to lose its control over the size of its liability. By the time FED wants to operate their measure to absorb liquidity,a strong inflation expectation prevails among market participants. Under such a circumstance, at low interest rate, such an instrument could fail to win popularity in the market. I must be missing some important elements in their plan, since they are smart enough to take such simple risks into consideration. Thanks in advance for your advice. Dear Sir

I understood from your article that FED is planning to reduce liquidity by selling long-term debt type instruments. Please correct me if my understanding is wrong.

If so, what if no one wants to buy such instrument at the very moment when FED wants to step in to absorb liquidity?

Here is a possible scenario:
FED faces a political pressure to maintain interest rate at low level simply because of the natural fear to lose its control over the size of its liability. By the time FED wants to operate their measure to absorb liquidity,a strong inflation expectation prevails among market participants. Under such a circumstance, at low interest rate, such an instrument could fail to win popularity in the market.

I must be missing some important elements in their plan, since they are smart enough to take such simple risks into consideration.

Thanks in advance for your advice.

]]> By: Hans http://blogs.reuters.com/great-debate/2009/03/26/fed-sets-out-exit-strategy/comment-page-1/#comment-10970 Hans Thu, 26 Mar 2009 17:44:14 +0000 http://blogs.reuters.com/great-debate/?p=2661#comment-10970 Smart moves; Question is will it work this time the same way it did over 50 years ago? The fifties were a period of growth where a lot of pent up demand was satisfied, allowing the fed and treasury to release/distroy this hot air as needed without creating inflation. How will this be possible today with lower growth rates? I do not know the how much money was involved then, but I would think it will take a long(er) time this time. In my opinion, they are playing with fire here, but is there another choice? Smart moves;
Question is will it work this time the same way it did over 50 years ago?
The fifties were a period of growth where a lot of pent up demand was satisfied, allowing the fed and treasury to release/distroy this hot air as needed without creating inflation.
How will this be possible today with lower growth rates?
I do not know the how much money was involved then, but I would think it will take a long(er) time this time. In my opinion, they are playing with fire here, but is there another choice?

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