The Fed’s exit strategy

This FT discussion is from former Federal Reserve Governor Randall Kroszner, who is now back at the University of Chicago.  Here is the closing bit:

Turning back to today, countries have committed to massive increases in
fiscal expenditure (see chart 4), much of which is not going to be
spent until 2010 or 2011. As economies begin to stabilise and grow,
central banks will face a dilemma – is growth part of a sustainable
recovery or due to a short-term impact of fiscal stimulus? If the
former, then it is sensible to implement exit strategies from unusual
accommodation; if not, then it might be appropriate to wait to see
whether growth has taken root, which entails greater risks of
inflation. Separating the impact of fiscal stimulus from sustainable
economic growth to determine the time to begin to “exit” will be a key
challenge for central banks during the next few years.

Read the whole thing; it also has a useful discussion of how interest on reserves plays into the idea of an exit strategy.


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