Any intervention by the government in our world economy will inevitably end. As such the Fed’s (and other central banks) plan to exit their intervention in this financial mess has come to fruition, amidst the scrutiny of many high-ranking officials.
Angela Merkel, the German chancellor, attacked the Fed along with the European Central Bank and the Bank of England for their “loose” policies. The Fed has done the best it can to quell long-term interest rates, which has unfortunately failed. It has failed because although interest rates were lowered temporarily, in that time, the public bought up assets (regardless of risk) , which flows money out of the treasuries and makes bond yields increase. These bond yields are also an enemy to economic equilibrium, so the Fed creates money in order to balance out these yields. Now the increase of the quantity of currency in the market itself makes investors nervous about inflation. To which the Fed reacts by printing more money to reduce bonds. Keeping this cyclical nature of how the Fed operates, how viable is the Fed’s exit strategy. Because it began the action of reducing interest rates the way it did, it is hard to believe that the Fed will get out of this crisis without leaving some kind of inflationary effect.
For more on the article from the Economist.com, click on this link.