Reverse Stimulus?

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.

Fed moves to drain some money out of economy


skylar said...

I am not sure if the market supports should be removed sooner than later. We are walking on a fine edge and the last thing the FED wants to do is rattle the markets and send us back to all time lows. You will see that the volumes behind the recent stock market run up are extremely weak and it would not take much to send us back down for a double dip.

Dr. Tufte said...

All of this seems OK, but I wonder how it relates to Managerial Economics.

The main difference on the Fed's part this time around is the scale of the unwind that they have to do.

Is there an economic reason why the response of managers should be different just because of the scale of the unwind?

Leah said...

I guess I felt like this will affect the economy as a whole and that will trickle down. I would argue that this will have an impact on everything from wages to prices. Managers should be prepared to deal with the unwind. It will affect them all differently. For example, managers will have to deal with consumer reactions and factor this into projections. The unwind will affect more than just the Federal Reserve.