Over a decade ago, on July 21, 2009, then Federal Reserve Chair Ben Bernanke wrote an article in the Wall Street Journal titled The Fed’s Exit Strategy. His words are all too familiar, starting with his opening sentences:
The depth and breadth of the global recession has required a highly accommodative monetary policy. Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero.
He follows with:
We have also greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit.
On July 28, 2021, as if continuing where Bernanke left off, current Fed Chair Jerome Powell explains many years later:
These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
In instances of a national housing crisis or global pandemic, money is supposedly injected into the system to prevent catastrophe. The flow of credit must have been so bad it required the Fed’s balance sheet to reach $2 trillion in July of 2009. It continued to expand ever so steadily, where it now sits at $8.3 trillion.
So, what happened to the Fed’s exit strategy?
In his letter, Bernanke wrote:
At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.
Given the tremendous expansion in asset purchases since 2009, it’s difficult to know when exactly the exit strategy commenced.
See the Fed’s balance sheet below:
According to Bernanke, the Fed devotes:
…considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner.
Sadly, like pulling troops out of a foreign nation, withdrawal is something which never comes easily.
He offers several ideas on how the Fed can be less accommodative, such as paying interest to banks on reserves held at the Fed or offering reverse repos, whereby the Fed sells a security to a bank with the promise to buy back the same security at a higher price. Per Bernanke, providing risk-free profits to wealthy intuitions will raise short-term interest rates and:
...limit the growth of broad measures of money and credit, thereby tightening monetary policy.
Unfortunately, the average person cannot access the Fed’s easy money programs, yet the average person is forced to accept these programs may create an “inflation problem.” Beyond perusing an old speech, wondering how society got here, Bernanke’s speech serves as a reminder that there really is no such thing as a Fed Exit Strategy.
In the realm of possibility, the Fed could one day dramatically reduce its balance sheet, no longer looking to control rates no matter the cost. However, nothing indicates this would be done voluntarily. Whether Bernanke, Powell, or the Chair who follows, no matter what the Fed says about tapering, tightening or tinkering with interest rates, they will never lift their foot from the gas pedal.
The Fed sets the rules to a game we all must partake in (as long as we use their dollars), therefore they have no incentive to ever stop playing. They have no desire to slow down the money creation scheme beyond a mild transient period. Raising rates is off the table, maybe even indefinitely. It follows, they will continue using Fedspeak to make excuses, justifying their interventions and trying their best to keep the general population unaware that this monetary experiment will not end well.
Some of us may want a truly free market, but those with the most power and influence appear to be in no rush of finding this anytime soon. Price discovery will have to wait for another day…
