Well-written peice by Kevin Warsh on the Fed

This WSJ editorial is a must read piece on the Fed, well written and thoughtful. The focus is on the exit strategy and that it will require "whatever it takes" focus.

Clear communication is required -

"Judgments made by policy makers in the current period are likely to be as consequential as any made in the depths of the panic. That means policy makers should continue to communicate as clearly as possible the guideposts, conditions and means by which extraordinary monetary accommodation will be unwound, including the removal of excess bank reserves."

Chance of policy error is high -

"It also means that policy makers should acknowledge the heightened costs of policy error. The stakes are high, in part, because the policy accommodation that requires timely removal as the economy rebounds is substantial."

In some cases, policy makers may have waited too long to remove easy-money policies. In other cases, policy makers may have acted too abruptly, normalizing policy before the economy was capable of self-sustaining growth. Errors of each sort are neither uncommon nor unexpected in the normal conduct of monetary policy. And the current period is anything but normal.

No ironclad rules but normalization may have to come sooner than expected -

"In this environment, market participants and policy makers alike should steer clear of ironclad policy prescriptions. Nonetheless, I would hazard the view that prudent risk management indicates that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary, and taking proper account of the policies being instituted by other authorities."

"Whatever it Takes" required on the exit -

"Whatever it takes" is said by some to be the maxim that marked the battle of the last year. But, it cannot be an asymmetric mantra, trotted out only during times of deep economic and financial distress, and discarded when the cycle turns. If "whatever it takes" was appropriate to arrest the panic, the refrain might turn out to be equally necessary at a stage during the recovery to ensure the Federal Reserve's institutional credibility. The asymmetric application of policy ultimately could cause the innovative policy approaches introduced in the past couple of years to lose their standing as valuable additions in the arsenal of central bankers."


This piece does not tell us when policy will change but it is clear that the Fed is thinking about it and is contemplating strong action. Let the market be aware that they may do what is necessary to control money when they think the easing should be curtailed. Nevertheless, for the trader this can only make you nervous while you wait for the Fed to change directions.