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What Happens If Fed Blows the Exit Strategy?

Posted Oct 30, 2009 11:25am EDT by Henry Blodget in Investing, Recession, Banking
Contrary to the hysterical panic you hear about inflation these days, it's actually not a problem, says the FT's chief economics commentator Martin Wolf.
 
Right now, the economy's capacity utilization and bank lending are so low, that inflation isn't taking hold.
 
All that could change, however, if the Fed blows its exit strategy.
 
If the Fed waits too long to stop giving away free money, inflation could start to gather steam.  If the Fed tries to combat this by raising rates, meanwhile, the shock could hit the stock market and slow the recovery.
 
Wolf thinks the Fed will have to start making noises about raising rates within six months--faster than most people expect.  Martin also thinks this move could hit the stock market.
 
Earlier with Wolf:

67 Comments

Yahoo! Finance User
Yahoo! Finance User - Friday October 30, 2009 11:32AM EDT

WWW.USDEBTCLOCK.ORG we're screwed anyway you look at it.

Yahoo! Finance User
Yahoo! Finance User - Friday October 30, 2009 11:33AM EDT

They won't be able to exit. We already saw what happens when they try. No politician has the guts to let the real economy show itself.

Terry
Terry - Friday October 30, 2009 11:40AM EDT

The FED is full of it as their secret exit plan is to resolve the crisis via HYPER-INFLATION. That's why they are printing so much money and devaluing our dollar. Also another YFU stated it clearly, "At the FED there is NO Federal and NO RESERVE. The FED is not a part of the US Government it is privately owned and that's why they resist being audited. No Senator should be in office more than 2 terms (12 years) and no Congressmen/women should be in office more than 3 terms (6 years) otherwise they do too much harm to us all. VOTE OUT the INCUMBENTS in 2010.

Yahoo! Finance User
Yahoo! Finance User - Friday October 30, 2009 11:40AM EDT

What exit strategy? It's always been the exit strategy for the wealthy not the economy. The Fed keeps asset prices inflated long enough for the wealthy to bail and move their money to safer investments or overseas. There are billionaires moving to China. Why? Because that's where the money is going to be.

Helga
Helga - Friday October 30, 2009 11:41AM EDT

I know that the dollar will rebound; the will be an under supply of money then a Deflation of assets. All that fed money has been used to plug holes in a leaking dike; thus is a reduced velocity of money supply. (no Spending on goods & services) Deflation will happen quickly and market falling will happen quickly. 100% certainty.

Yahoo! Finance User
Yahoo! Finance User - Friday October 30, 2009 11:46AM EDT

Yahoo! Finance User - Friday October 30, 2009 11:33AM EDT They won't be able to exit. We already saw what happens when they try. No politician has the guts to let the real economy show itself. I agree. They'll just keep printing money and kick the can down the road until it's off their watch. I'm afraid it won't ever be right again, or it'll take a big problem (global war) to reset everything. Hard to be optimistic, that's for sure.

Arisian!
Arisian! - Friday October 30, 2009 11:51AM EDT

Odd that so many of the talking heads say inflation is virtually nonexistent while food, rent, insurance (medical and otherwise) and other necessities are rising at a pretty good clip in most areas. When considered with the fact that median pay (in real-world, inflation-adjusted terms) has actually fallen considerably, I can only say that these guys are only parroting the same idiocy that so many others seem enamored of. Bottom line? Most of us are in for some brutal reductions in our standard of living, and the resulting scrimp-fest will continue to squeeze every other aspect of our economy for years to come. Anyone who says otherwise probably has interests better served by confusing the issue.

Yahoo! Finance User
Yahoo! Finance User - Friday October 30, 2009 11:52AM EDT

Blow the exit strategy? If not for the madman Ben Bernanke and his reckless string of sixteen consecutive interest rate hikes, we wouldn't be in this mess. So, as he singlehandedly caused this recession, he'll singlehandledly make it worse. In other words, if you liked Bernanke Recession I, you're going to love Bernanke Recession II.

Tex
Tex - Friday October 30, 2009 11:55AM EDT

The folks that comment on TT sure don't have much confidence in our government. We need Paul Volcker to explain M1, M2, M3 controls to the public. He got us through the last mess.

Tex
Tex - Friday October 30, 2009 11:55AM EDT

The folks that comment on TT sure don't have much confidence in our government. We need Paul Volcker to explain M1, M2, M3 controls to the public. He got us through the last mess.

BobDiaz
BobDiaz - Friday October 30, 2009 11:56AM EDT

Here's the exit strategy, take care of the big guys, screw the little guy and make sure the taxpayers get the bill. Who thinks their taxes won't go up? How is the Federal Government going to pay off all the massive debt we created to help the big guys? Be sure to thank Obama and all the spend crazy Democrats for the upcoming screw job.

MGA_1
MGA_1 - Friday October 30, 2009 12:01PM EDT

What exit strategy? If they raise interest rates they crash the economy. If they don't yank toxic assets out of the banks, the banks crash, then lending crashes and the economy crashes. What they need to do is do the exit strategy and let the economy crash and reconfigure, but that would be very politically unpopular. I don't think they'll reconsider the current course of action which will eventually push us into heavy (probably not hyper) inflation. Americans will eventually freak about consumer prices tripling and then they'll reign in the stimulus.

SF Badger
SF Badger - Friday October 30, 2009 12:06PM EDT

Where were all you experts when Bush/Cheney "forgot" to budget for the wars in Iraq and Afghan in the Federal Budget? If any of us did something like that in our organizations, we would have been booted out the door by the CFO and Board of Directors. In the political world, you get re-elected.

Terry
Terry - Friday October 30, 2009 12:11PM EDT

wes C - Friday October 30, 2009 11:03AM EDT The Federal Reserve Bank is a private Corporation run by private individuals to make a profit. They control this country. Look up the Money Masters, Bohemian Grove, Trilateral Commission, federal Treade Commission, WTO. All ran by and contrllled by the same people. They control the media, They got Obama into the Presidency as they have the others since 1920s or 1930s. They control the recessions, depressions, transgressions of the United States. The Federal Reserve makes our money and charges the government to do thaT. //////////////////////////////////////////////////////////////////////////////////////////////////// It's amazing how they fool people into thinking that they the FED are part of the government when they're not.

Yahoo! Finance User
Yahoo! Finance User - Friday October 30, 2009 12:12PM EDT

The FEDS....Never Had A Exit Strategy.....Mr. Bernanke..Is Hoping For....A "Big Miracle",,,He is Hoping That ...ALICE IN WONDERLAND....Will Come To Washington...And "Wave" Her Magical Wand Or whatever she ..Has....And "Boom" Everything...Is Normal Again.......What A "Rude" Awakening....AMERICA....WE ALL ALL....GOING DOWN THE.....BIG OLD TOILET...!!!!!! The 1930's....Depression....WAS A PICNIC...Compare To What Is A...COMING....DONT BUY Anything....."SAVE YOUR MONEY"....Amen.

monk man
monk man - Friday October 30, 2009 12:25PM EDT

What a joke American or should I say Soviet style capitalism is. Kick out the supports and let natural selection take over, you know the smart and strong survive and the stupid and weak die so as a whole we become stronger and smarter to move forward

Suzanne
Suzanne - Friday October 30, 2009 12:25PM EDT

wake up...print more money, TIP OFF the Chinese and Japanese EVERY SINGLE TIME you make a market moving announcement...they still buy our debt (HOORAY!) with the money every 401K fronts them (BOO)...and keep the illusion alive until Goldman Sachs hires you.... and you can make $150 Million dollars and you know your descendents won't ever need a "job thingy" xxoo, Mike

Yahoo! Finance User
Yahoo! Finance User - Friday October 30, 2009 12:26PM EDT

M3 has been put out to pasture. It got too embarrassing.

Yahoo! Finance User
Yahoo! Finance User - Friday October 30, 2009 12:29PM EDT

Get it over with so we can at least move on. These artificially low rates & stimulus are a joke and only entice more deeper into debt while the too big to fail get bigger without showing true profits or job creation. The whole thing is smoke and mirrors to reassure the consumer to spend more without really fixing anything...the job market. Life still goes on with higher interest rates but maybe with more caution. Folks still get married and save for a home (they may have to wait a few years instead of taking it for granted they get one at the wedding). Folks will move with different employment, buy bigger homes for growing families. Our 1st home with 1st time buyer financing was 11.9% in the 1980's recession and we thought nothing about it except how lucky were to be back to work after more than a year lay off, and found a place to call home. When rates dropped (imagine what the other rates were!) years later we refinanced. Jobs are the key to a sense of wealth and security...not illusionary figures.

Yahoo! Finance User
Yahoo! Finance User - Friday October 30, 2009 12:38PM EDT

I Think That What He...."Means" to say...Is that the...."EXIT STRATEGY"....Is Mr. Geithner, Mr. Obama, & Mr. Bernanke...High Tailing Out Of The U.S.A.....After..."Trasferring"....$$$$ 40-50 Billion Dollars..Into A Swiss Bank Account....And Living The..."Rich & Famous"...Lifestyle....In A Third World Country...For The rest of their..Lives...Ha,Ha,Ha,Ha,Ha.

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