Permanent Value

Week in Review 7/8/13

Bruce Doole
July 10th, 2013


Q: What are your thoughts on the exit strategy?

A: For some time now Fed officials have indeed suggested that asset purchases — currently amounting to $85 billion in Treasury and mortgage-backed securities each month — can end if the “costs” prove prohibitively high or the “efficacy” becomes muted, irrespective of the state of the labor market. At its June 2011 meeting, the FOMC outlined fairly transparently the sequence of exit steps that would occur following genuine further improvement in the labor market.

Q: Is there a level of unemployment and inflation that virtually guarantees a move?

A: No. We only have thresholds, as distinct from triggers or targets. Fed officials, particularly Janet Yellen, have emphasized this point. As far as the fed funds rate goes — as distinct from the balance sheet and purchases — a 6.5% unemployment rate is a necessary but not a sufficient condition for policy action. On the other hand, the 2.5% unconditional inflation threshold seems like a sufficient condition for raising the funds rate.

(Benson Durham is an economist and a fixed-income investment analyst at Capital Group. Before joining Capital, Benson worked as an economist at the Federal Reserve Board. Federal Reserve officials appear to be preparing investors for changes in the Fed’s accommodative policies, including a reduction in its bond-buying programs.)

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