Fisher Investments Editorial Staff
US Economy

The Plan That’s Just a Plan

By, 02/11/2010

Story Highlights:

  • Fed Chairman Ben Bernanke released a statement Wednesday unveiling an exit strategy to pull trillions of dollars out of the US economy.
  • For now, it appears the Fed isn't in any hurry to further tighten monetary policy.
  • Instead, Bernanke indicated the Fed is ready to gradually deploy a number of monetary tools—including raising rates—as the economy improves.
  • But until the economy's health is on surer footing, Bernanke's plan remains just a plan.


For those of you who believe in global warming, its latest victim was a hearing Fed head Ben Bernanke was supposed to have with the House Financial Services Committee on Wednesday. For those of you who don't believe—well, there sure is a lot of snow out east (also known as "weather").

Snowed in, Bernanke instead released a statement unveiling more details on the  exit strategy to extricate the extraordinary monetary stimulus enacted over the past 24 months. For now, and unsurprisingly, it appears the Fed still isn't in any hurry to tighten monetary policy other than the already-planned termination of a few inherently short-term programs, and there was no mention of raising the Fed funds rate just yet.

And, there's no need to start raising rates right away, because rate policy is just one weapon the Fed has. Bernanke announced plans to deploy reverse repos—an agreement for the Fed to sell securities to banks with the understanding the Fed will repurchase the securities sometime in the future. Additionally, the Fed is planning to offer term deposits—a new facility that would function like certificates of deposits sold to banks and financial firms. Other options include selling the mortgages and Treasurys it had purchased to shore up Fannie and Freddie's balance sheets. All of these effectively could help absorb additional liquidity sloshing around the system.

But when (not if) the Fed does decide to raise rates, it's important to note that it's not an economic death knell. In fact—as the below table shows—historically, the first rate raise in a tightening cycle has led, overwhelmingly, to positive returns 12, 24, even 36 months out. And when returns were negative, they were down just a bit. This isn't counterintuitve—after all, though the Fed can (and certainly does) make errors, they generally don't want to raise rates unless they think the economy can handle it.

S&P 500 Performance Following First Rate Hike

Source: Federal Reserve, Global Financial Data, Inc. Price Returns

And keep in mind, we aren't even at the point where we've seen the first rate raise—which may not come for some time, as the Fed deploys some other weapons in its monetary arsenal. Today's announcement (anticlimactically snowed out as it was), gives us more details, but the exit plan is still just a plan and—until the economy is on surer footing—likely a very gradual plan at that.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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