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The Limits Of Monetary Policy

The Federal Reserve is likely to continue with its asset purchase program through all of 2013. This is because the pace of improvement in the jobs market is not going to be as robust as that which would be necessary to resolve the long-term structural unemployment problem. Even once a point has been reached where the Fed would deem the unemployment level acceptable, which current guidance suggests is around 6.5%, they will still be concerned about exiting Quantitative Easing (QE) too abruptly. By then, the Fed will regard QE as an insurance policy against the risk of the economy starting to slide. At some point though, the Fed will need to step away and let market forces take over once again. Problems could arise when the market begins to try to anticipate the termination of QE or the reversal of the increase in the Fed's balance sheet. By this time next year, the Fed's balance sheet could be as large as four trillion dollars.

Read more in my weekly Maco View >