Magazine article American Banker

Fed Says It Can Withdraw Liquidity When Time Comes

Magazine article American Banker

Fed Says It Can Withdraw Liquidity When Time Comes

Article excerpt

Byline: Steven Sloan

WASHINGTON - Top Federal Reserve policymakers insisted Wednesday that the central bank has the tools it needs to withdraw all the liquidity it has injected into financial markets but said action on that front is not yet necessary.

"When the time comes, I am confident the Fed has the tools to reverse the assumed monetary stimulus and exit the policies put in place in reaction to the financial crisis and the recession," Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in a speech at the University of South Alabama.

"I do not think that time has yet come, and ... I think it may well be some time before [a] comprehensive exit need be underway."

Donald Kohn, the vice chairman of the Federal Reserve Board, appeared to echo that sentiment.

"I cannot give you a small list of variables that will trigger an exit," he said during a panel discussion at the Cato Institute. "We have the framework to exit from these policies when we need to do so."

As the financial crisis deepened over the past two years, the Fed increasingly coordinated its actions with other central banks.

Speaking at the same panel, Anthanasios Orphanides, a member of the European Central Bank's governing council, indicated there was little sunlight between the Fed's position and that of its European counterpart. "Talking about this topic does not suggest that now is the appropriate time to exit from unconventional policy measures," he said. "Nonetheless, it is important to communicate that an exit strategy exists."

Exactly how policymakers will know the time is ripe for a pullback remains the subject of great discussion.

Pointing to the lag between a policy decision and its impact on financial markets, Kohn indicated the Fed would begin a withdrawal before the financial sector fully rebounds. …

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