What’s Next?

What’s Next?

An op-ed in today’s Wall Street Journal written by Kevin Warsh, a member of the Federal Reserve Board of Governors, is a must-read. Without striking a self-congratulatory tone about their apparent successes thus far in averting catastrophe, the article provides insights into the ramifications of decisions made by the Fed over the past two years (remember, the financial crisis started in 2007) as well as the pitfalls that might lie ahead.

One of the more salient comments in the article was that policy normalization (i.e. winding down liquidity programs, raising interest rates, removing excess bank reserves and suspending mortgage-backed securities [MBS] purchases) would need to begin before it was “obviously necessary” and that it could possibly be done with “greater force” than is customary. The Fed has already indicated that it will keep interest rates at very low levels for a long time and announced this week that the MBS purchase program will be shut down by March 2010. Thus, figuring out how to remove the rest of its $2+ trillion footprint from the economy, while at the same time minimizing the potential for harm, will likely prove to be the most difficult part of all for the Fed.

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