Fed takes third step in exit strategy
As Confucius听Lao Tzu once said, a journey of a thousand miles begins with a single step. The Fed faces just such a journey today: returning monetary policy to normal as the economy heals. And in case you didn鈥檛 notice, the Fed has already taken three steps down the road.
Step 1 was the termination of various special credit facilities (e.g., the Term Auction Facility) that were created to provide liquidity during the crisis.
Step 2 was last week鈥檚听听that the Fed was increasing the discount rate from 0.5% to 0.75%.
Step 3 is today鈥檚 听that Treasury is reviving the Supplementary Financing Program (SFP). Over the next two months, Treasury will issue $200 billion in bills for the SFP and then place the proceeds in its account at the Fed. The SFP will thus mop up $200 billion of liquidity that Fed asset purchases have injected into the monetary system.
Treasury began the SFP in September 2008 when the Fed needed help sterilizing the monetary impact of the programs it created to provide liquidity to the financial sector. The program peaked at more than $500 billion in late 2008, and then began to decline as sterilization ceased to be a Fed concern and as the federal debt limit began to loom.听With the recent increase of the debt limit, Treasury again has room for the SFP, hence today鈥檚 announcement.
Update: Thanks to Brooks for pointing to Lao Tzu as the source of the famous quote; many sites attribute it to Confucius, but those claiming Lao Tzu seem more credible. If you start Googling or Binging this topic, you can also explore such amusing issues as: How do you spell Lao Tzu? Didn鈥檛 he really say 鈥渁 journey of a thousand miles begins beneath one鈥檚 feet鈥�? And 鈥渨ait a minute, the ancient Chinese didn鈥檛 use miles, did they?鈥�
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