•The Fed Chairman signaled that while the planning for the next interest rate cycle
is intensifying, near-term efforts remain focused on a highly accommodative policy.
• The sequencing and tools for removing accommodation will be directed mainly at
controlling short-term interest rates and not the level of reserves per se. Money
and credit have weakened despite massive reserve creation but conditions should
stabilize later this year.
• Reserve-draining likely will run slightly ahead of rate hikes, with interest on
reserves temporarily serving as a key policy guide in the event the funds rate
eludes control. The strategy is a direct challenge to widespread speculation that
unwinding accommodation cannot be accomplished without higher inflation or
major financial disruption.
• Incoming data continue to support the moderate recovery theme. While small
firms remain downbeat, their key activity gauges point to stronger growth in the
sector, including employment.
Planning for a Graceful Exit
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