Fed Keeps Interest Rate at Historic Lows, Hints at an 'Exit Strategy'

Economists read the tea leaves on the Fed's announcement

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Flouting speculation that it might change course the Federal Reserve has decided to keep interest rates at historically low levels. Critics, including Warren Buffett, have warned that flooding the economy with money (nearly $2 trillion now) could spark inflation. But supporters believe it's necessary to keep spurring the economy to build on early signs of recovery.

Though the news was no surprise, the move caused the market to stumble, and the dollar's value fell . Economic pundits are meanwhile parsing the language of its statement. What do they see? Some are interpreting the Fed's analysis as a sign that it will keep interest rates low as long as possible, while giving market watchers hints of an eventual exit strategy.

  • Must Stay Vigilant Against Inflation, says Brian S. Wesbury and Robert Stein at Forbes (hat tip: Economy Watch). "The economy is bouncing back rapidly in a V-shaped pattern. And the sooner the Fed lifts rates, the less inflation (and more economic stability) the U.S. will have down the road...loose money is never a good long-term stimulant. In fact, the longer it takes the Fed to move toward the exits, the more damage will be done, and the harder it will become to exit at all."
  • Where's the Worry About Unemployment? writes Ryan Avent at the Economist. "I must say, I don't understand it... Most signs indicate that unemployment will linger near 10% for another 12 months, if not more. And many signs indicate that sustained high unemployment will likely generate a string of potentially unfortunate policy responses from the legislature. Why is the Fed content to allow this level of cyclical unemployment?"
  • Same Policy, With Strings Attached, suggests Krishna Guha at the Financial Times. "Implicitly the statement also indicates that if these conditions are not met the Fed may have to raise rates within the six month period...If the forecast plays out as expected and the conditions are met, the Fed will not be raising rates in the next six months. But, the fact that the committee saw the need to tinker with the statement highlights that this is far from 100 per cent certain.
  • Fed Created an Exit Strategy  Phil Izzo gathers economist reactions at the Wall Street Journal. "The best way for the Federal Reserve  to smoothly exit from its current stance on monetary policy is to make it more a process than an event, in particular by conditioning any change in the commitment on rates to economic and financial conditions. The Federal Reserve today conditioned its commitment on rates, by adding in three conditions that will determine the future course of monetary policy:... 'low rates of resource utilization, subdued inflation trends, and stable inflation expectations' ... In citing these three conditions, the Federal Reserve has provided a guideline by which market participants can gauge with greater precision the evolution of monetary policy, in particular the exit strategy."
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