Federal Reserve’s 5 Step Exit Strategy

According to the minutes from the April Federal Reserve monetary policy meeting, here is the 5 step exit strategy that policymakers prefer at this time:

1) End QE2 in June
2) Stop reinvestment some time this yr
3) Remove the “extended period” language in Q4 or early 2012
4) Raise interest rates
5) Start selling assets in 2012/2013

Nearly all of the FOMC members agreed that the first step should be to stop reinvesting payments of principal on agency securities and then soon after Treasury securities. By doing this, they would be reducing the size of the central bank’s balance sheet which would be a small step towards policy tightening. Changes to the FOMC statement regarding forward policy should also happen at that time. The second step would be to raise interest rates and then gradually sell off their existing securities. The reason why they are leaning towards raising rates first is because it would give them the flexibility to lower rates later if economic conditions then warranted. Although talk of an exit strategy has helped to lift the U.S. dollar, the Fed also said that discussions of an appropriate exit strategy does not mean that they are looking implement one soon.

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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