According to an article on yahoo finance the Federal Reserve is working on a strategy that will recoup some of the money that has been injected into the economy during the recession. I feel like this is a great idea and is necessary for markets in general. It is obvious that government intervention is a debatable subject. Liberals and conservatives debate government intervention all the time. Basic economics tell us that when the government intercedes they need to do so briefly so that the market does not become dependent on the government supplement. The Federal Reserve Bank’s actions are brought about by a need to fend off inflation. At some point the Federal Reserve will have to make a bold move to increase interest rates and remove other market supports that are currently in place. If these actions are foregone the Federal Reserve will have major problems trying to remain solvent while keeping up with inflation. The proposed actions include reverse purchase agreements where the Federal Reserve will sell securities with an agreement to buy them back at a later time. The yahoo article says, “The operations will be “extremely small” and won’t affect the Fed’s key interest rate…”. Apparently these “operations” are only test runs that will serve to prepare the Federal Reserve as well as the markets for when they will have to make bigger moves. The Federal Reserve has a significant challenge ahead because removing the market supports prematurely could derail the recovery entirely.
I feel like the market supports should be removed sooner than later. If the markets become reliant on these supports it will lead to more problems for the market as well as the government. I am not suggesting that the markets be left to fend for themselves at this point. I really like that the Federal Reserve is proposing to diminish intervention. It seems like that is the first step in the right direction and it will help markets in the long run.
Reference the article below as well as the textbook for additional information.