U.S. Fed needs exit strategy from its massive stimulus

“Federal Reserve officials are confident that monetary policy accommodation can be scaled back in time to prevent inflation from rising too sharply. However, officials are also aware that many financial market participants aren't as confident in the Fed's ability to contain inflation.”

The Fed has already embarked on a massive program to purchase up to US$1.2 trillion in government and agency debt in an effort to bring down a variety of interest rates it does not control.

Bernanke calls the effort “credit easing” while others call it “quantitative easing.” It is aimed at lifting the economy out of its worst crisis in decades.

But a sharp rise in bond yields, which translates into higher lending rates for mortgages, has raised fears that the recovery could falter despite Fed efforts.

Julian Callow, economist at Barclays Capital, said that the shift in market interest rates should be viewed as a success story of the Fed, not a failure.

“Since the world is no longer priced for depression and deflation, the Fed's quantitative easing can be judged a major success,” he said.

“The easing had a major impact on equity market confidence: two-thirds of the 42 percent rally in global equity markets since the low on March 9 came in the wake of the March 18 FOMC announcement.”

Economists at UBS said the FOMC statement “will reflect a bit more optimism on the prospects for recovery but also a stronger signal that there will be no rush to unwind stimulus.”

They argued that “along with the potential for a quick unwinding of stimulus to undermine a nascent recovery, the likely downward pressure on inflation from slack will likely also encourage officials to be slow in tightening, notwithstanding criticism that the Fed was too slow to remove stimulus after the last downturn.”

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