Tags: Fed | unwinding | stimulus | balance

Sterne Agee's Piegza: Fed Will Have Difficult Time Unwinding Stimulus

By    |   Friday, 23 May 2014 08:47 AM

The potential for mistakes is large as the Federal Reserve embarks on the process of withdrawing its massive monetary stimulus, economists say.

"It's not that I don't have faith in the Fed or think these are not some of the smartest economists out there. This is unprecedented territory," Lindsey Piegza, chief economist at Sterne Agee, tells CNBC.

"It's going to be very difficult to understand those unintended consequences on the back end of these policies. . . . That confusion of how to unwind these unprecedented policies says to me there's going to be a lot of volatility, a lot of missteps."

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The Fed already has begun tapering its quantitative easing, reducing its bond purchases to $45 billion a month from $85 billion last year.

The central bank's federal funds target stands at a record low of zero to 0.25 percent, and many economists don't expect it to raise the rate until at least the second half of next year.

Meanwhile, the Fed has a balance sheet of more than $4 trillion to unwind.

"We have to be ready for some bumps and volatility," Piegza warns. "The Fed's going to do the best job it can, but it's unlikely that it's going to be the perfect, smooth transition."

Philadelphia Federal Reserve Bank President Charles Plosser, a leading hawk among Fed policymakers, is concerned about banks' $2.5 trillion of excess reserves, which are parked at the Fed.

That money could push inflation dramatically higher if banks suddenly lend it en masse, he told reporters, MarketWatch reports. If borrowing heats up, "that's going to put pressure on inflation," Plosser said.

Consumer prices rose 2 percent in the year through April.

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The potential for mistakes is large as the Federal Reserve embarks on the process of withdrawing its massive monetary stimulus, economists say.
Fed, unwinding, stimulus, balance
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2014-47-23
Friday, 23 May 2014 08:47 AM
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