Plosser: Exit Strategy Should Include Return to Reliance on Fed Funds

The exit strategy principles the Federal Open Market Committee suggested in June 2011 are still valid, and Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser said Tuesday, especially using the federal funds rate as the main policy instrument.

"Eventually, economic conditions will improve enough that the Fed will need to begin exiting from this period of extraordinary policy accommodation and start normalizing the monetary policy operating framework, Plosser said in a speech in Beijing, China, according to prepared text released by the Fed.

"In particular, we should return to an operating framework in which the federal funds rate is our policy instrument, we should shrink the size of our balance sheet consistent with this framework, and we should shorten the duration and return the composition of our portfolio to all Treasuries," he said. "The exact steps taken and the timing to arrive at this destination have many complexities that are difficult to fully anticipate, given the very limited theory and evidence we have in operating in these uncharted waters."

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