Saturday, May 8, 2010

Fed's "exit strategy" has begun!



The Fed has quietly begun its exit strategy. Take a look at the chart below. Reserves have fallen over $200 billion since mid-February and are now just slightly over $1 trillion and headed lower.



Treasuries are rallying now because of a flight to quality, however, the Fed's engineering of this reserve drain means that rates will rise. Sell into this bond rally.

3 comments:

googleheim said...

Mike :

1. How will this affect domestic lending to business and consumers ?

2. How will the affect Asian commerce ?

3. How will this affect European crisis : i.e. the debts being handled over there ?

4. How will this affect the US Dollar from the point of view of those who are out of paradigm ?
... in paradigm ?

Please detail in detail!

Regards

Mike Norman said...

Fed engineers lower reserve balances to bring interest rates up. Not much more to it that that. I think the dollar's going up, but there could be hiccups along the way, like when the Fed supports the euro via swaps.

googleheim said...

If they raise rates, and people are already coming back to a dollar safe haven, then higher interest rates are an engineering attempt to attract more foreign monies to the USA.

How does flight to the dollar affect the US economy ? more liquidity ?