Magazine article American Banker

Phila. Fed Exec: Central Bank Exit Plan Needs Work

Magazine article American Banker

Phila. Fed Exec: Central Bank Exit Plan Needs Work

Article excerpt

Byline: Steven Sloan

WASHINGTON - The Federal Reserve Board should better articulate how it will return its balance sheet to normal once the market turmoil ends, Charles Plosser, the president of the Federal Reserve Bank of Philadelphia, said Wednesday.

As the Fed has launched nearly a dozen lending programs for banks and other institutions, concern has grown that the central bank may have trouble unwinding its facilities smoothly.

"We must create an exit strategy from these various facilities," Mr. Plosser said in a speech at the University of Delaware. "They were created for extraordinary times and involve significant intervention in credit markets. They are not part of the normal operation of a central bank and should not be expected to continue."

Mr. Plosser's comments came the same day that the Fed released its Beige Book report on economic conditions. The report found widespread deterioration in the housing and lending sectors, making it unlikely that the Fed's balance sheet will return to its pre-crisis look anytime soon.

Still, Mr. Plosser's speech served as an unusually candid account of challenges the Fed's liquidity programs may pose. He raised concern that outside forces would complicate matters for the Fed as it decides how to end certain programs. "Will we face challenges when we attempt to liquidate these longer-term assets from our portfolio?" he asked. "Will there be pressure from various interest groups to retain certain assets? Will there be pressure to extend some of these programs by observers who feel terminating the programs might disrupt 'fragile' markets or that the economy's 'headwinds' are too strong?"

"Such pressures could threaten the Fed's independence to control its balance sheet and monetary policy," he said.

Fed Chairman Ben Bernanke outlined his vision of an "exit strategy" in a speech Tuesday in London. …

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