Fed Hints at an Exit Plan for Its Emergency Support Measures

Posted Dec 17th 2009 3:20PM by Connie Madon

Yesterday's Federal Reserve can be viewed in two parts. First we have the restatement of the Fed's low interest rates, by keeping the Fed Funds rate at 0 -- 25% for an "extended period."

It repeated that economic activity was improving. Specifically, housing and consumer spending were up a bit. The unemployment picture, while still weak, is showing signs of bottoming.

But this is not the real news. In a detailed statement the Fed explained how it would exit its emergency programs. It said that it would still buy $1.25 trillion dollars of agency mortgaged backed securities and $175 billion of agency debt. What is significant is that it will terminate these programs during the first quarter of 2010. This is the first piece of hard news from the Fed since these programs began.

The Fed is showing its willingness to exit its emergency measures in a rather short time. It also said that it would modify its plans if necessary, to support financial stability and economic growth. This rather subtle statement is indicative that the Fed is ready to raise rates if needed.

The latter part of the Fed's statement sparked a rally in the US dollar and corresponding sharp sell off in gold. Other commodities are also selling off this morning.

For traders, keep in mind that the Fed's willingness to stop their spending is a good sign for a stronger dollar. How long the dollar rally will continue is unknown.

Do you believe the Fed's new policy will help our economy?

Tags: federal reserve, FederalReserve, inthenews