Ahead of Bernanke’s testimony in front of Congress this week, we’ve seen some modest splintering in the opinions of its members in terms of when to unwind their massive accommodation. In one corner is Hoenig who dissented at the last meeting in keeping the ‘exceptionally low’ for an ‘extended period’ language. In the opposite corner is Yellen who in a speech given today said “the economy still needs the support of extraordinarily low rates.” She sees “convincing evidence that an economic recovery is well under way” but highlights many risks to it, which we all know. She believes in the asymmetric policy of slashing rates once the economy turns south but keeping them low well after the recovery begins. Hoenig seems to think that emergency rates aren’t appropriate when the emergency is over. Either way, what the Fed does with their huge holdings of MBS/agency paper will lead the discussion over what comes next.
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