Following a string of better-than-expected economic data – including Monday’s durable goods report — and a rally that took major averages to 5-year highs, talk is once again heating up about the Fed’s “exit strategy.”
Last week at Davos, George Soros said there is a risk of a “big leap” in interest rates “once the economy gets going.”
But don’t expect any hints of the Fed getting ready to remove stimulus at this week’s FOMC meeting, says Princeton professor and former Fed vice chair Alan Blinder.
“It’s never too soon to start thinking about it [but] I’d be very surprised if Fed even starts on its exit starting in 2013,” Blinder says. “I wouldn’t even bet on 2014.”
Blinder’s view is based, first, on a forecast that U.S. economy will only grow about 2.5% this year. And that’s assuming “nothing terrible happens; we could still have national debt ceiling crisis,” he warns.
Second, he says it’s premature for the Fed to exit because inflation remains so low, with CPI up just 1.7% on a year-over-year basis while the core rose 1.9%.
“When I hear people say ‘we’re building up to 10% or 12% inflation rate’, I just don’t know what they’re thinking,” Blinder says. “The only way that could happen is utter and complete incompetence at the Federal Reserve.”
Some people believe we already have that, of course, but Blinder is not among them.
That said, he does expect “some error in execution” when the Fed eventually begins its exit strategy -- meaning they’ll either start too soon and curtail the recovery or start to late and have a inflation problem on their hands.
“The Fed wants a 2% inflation rate – I can easily see when dust settles…we come out with 3% or 1%,” Blinder adds. “Maybe if they’re not very good at all at their job maybe 4% or zero.”