Tightening: Coming to a Central Bank Near You ?

Is the Fed more likely to tighten than traders are anticipating? That’s the suggestion made by a Bloomberg column this evening:

“Words may speak louder than actions for Federal Reserve Chairman Ben S. Bernanke when the time comes to outline plans to raise interest rates and shrink the central bank’s balance sheet.

As the economy rebounds from the worst financial crisis since the Great Depression, the Fed must decide when to cease saying that economic conditions “warrant exceptionally low levels of the federal funds rate for an extended period,” a phrase it introduced in March 2009. It also must determine how to normalize a balance sheet that ballooned to a record $2.34 trillion after the purchase of $1.25 trillion of mortgage-backed securities.

Altering a pledge to keep short-term borrowing costs low or articulating plans to begin selling the $1.1 trillion in mortgage-backed securities it now holds will amount to a tightening of monetary policy because the announcements will send bond yields higher, raising borrowing costs, said Mitch Stapley, chief fixed-income officer at Fifth Third Asset Management in Grand Rapids, Michigan . . .”

Feel free to discuss. . .


Fed Hinting on Mortgage-Bond Sales Brings Bernanke Tightening
Scott Lanman and Caroline Salas
May 10 Bloomberg, May 10 2010 

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