US Federal Reserve has no exit strategy: how to stop the stimulus?

Last week officials of the Federal Reserve were holding intense talks on developing exit strategies. According to the sources familiar with the matter the policymakers divided over to sell billions of dollars assets first or raise the interest rate.

The discussion was more robust than described by the Fed Chairman Ben Bernanke at the news conference on April 27. At that time Bernanke said the committee "continued its ongoing discussion of the available tools for removing policy accommodation…”

However, the knowing sources reported that the Federal Open Market Committee that included a variety of options by Fed staff members, had not had such a pointed discussion on exit strategies in about a year.

While there was no mention at the meeting on the timing and form of the exit, it is commonly believed that among the first steps there will be ending the reinvestment policy.

Under current policy, the Fed has pledged to maintain the size of its balance sheet by purchasing additional securities with the proceeds from instruments that are either pre-paid or mature.

Letting the balance sheet shrink through a natural roll-off of securities, which would reduce the amount of excess reserves in the banking system, would amount to a tightening of policy.

Bernanke revealed at his news conference the general agreement about allowing reinvestment policy to be one of the earliest exit strategy steps.

“At some point, presumably early in our exit process, we will, I suspect, based on conversations we've been having around the FOMC table, it's very likely that an early step would be to stop reinvesting all or part of the securities which are coming — which are maturing,” Bernanke said.

Yet, a new development appears to be a lack of consensus over the next steps.