Transcripts

What's The Federal Reserve's Game Plan?

SUSIE GHARIB: Federal Reserve policymakers meet tomorrow and Wednesday to decide what's next for interest rates and the economy. They're expected to hold rates steady. The big question though is whether the central bank will begin to unwind the many programs it put in place during the financial crisis to stimulate the economy. Erika Miller reports.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: We all know this sign. It shows you how to exit. Now investors want to know if the Federal Reserve board knows how to exit its own policy strategy. Are policymakers ready to explain how and when they will reduce the Fed's economic stimulus efforts?

JAN HATZIUS, CHIEF US ECONOMIST, GOLDMAN SACHS: I don't think we are going to get that for a long time. Under my forecast for what the economy does and what inflation does, it would be inappropriate to send such a signal -- or in fact to exit -- for the foreseeable future.

MILLER: Goldman Sachs economist Jan Hatzius says policymakers face a serious dilemma about when to start raising short-term interest rates, which are at historically low levels. Raise rates too quickly and risk derailing the recovery and rattling financial markets. Raise rates too slowly and risk pushing up inflation. Economist Thomas Burner expects policymakers to keep rates low for a long time.

THOMAS BERNER, U.S. ECONOMIST, UBS WEALTH MANAGEMENT RESEARCH: Historically they have always waited until the unemployment rate peaks. I don't see the unemployment rate peaking until late first half of 2010, so second quarter 2010. So, as of now, I don' think they will hike rates until about September of next year.

MILLER: In addition to deciding when to raise rates, the Fed must also figure out how to phase out several liquidity programs. They include short-term commercial paper loans to U.S. corporations, as well as money lent abroad through foreign central banks. The Fed also has to figure out when to stop buying Treasuries and mortgage-backed securities and whether to start selling some of those assets. Many economists think the Fed's emergency lending efforts will peter out on their own.

HATZIUS: A lot of the liquidity programs are, in a sense, self- unwinding, because they are essentially lines of credit in some sense that will be wound down somewhat automatically if they are no longer needed because the financial system is normalizing. And that's already happening in a number of areas.

MILLER: Many economists expect the Fed's asset purchases to continue through the rest of the year, but there's debate about whether the Fed will eventually sell some of those securities. Many economists think the Fed will hold the bulk of its portfolio until maturity. Erika Miller, NIGHTLY BUSINESS REPORT, New York.