Timing of QE exit depends on the economy
A few weeks back Bernanke discussed the exit strategy in his Wall Street Journal article and in testimony to Congress, emphasising that the process of reversing QE is not difficult but the issue is timing. The Fed may use a partial reversal of QE as a first step to tightening before it begins to raise rates, but that it will certainly not attempt to bring the Fed's balance sheet all the way back to normal before hiking. The Fed's balance sheet will likely contract anyway over the next twelve months as some of the special liquidity programmes wind down. Beyond that the Fed may begin to sell short term maturity debt into the market to mop up excess reserves. Depending on the strength of the economy this could begin during the second half of 2010. But it will likely continue hand-in-hand with rate hikes during 2011.
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