Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Everything You Think You Know About the Fed's Exit Plan May Be Wrong

Federal Reserve Board Chairman Ben Bernanke
Getty Images

Everyone knows that the Federal Reserve's overnight interest rate targets will not rise before quantitative easing ends.

The exit strategy will be: QE first, rates later.

Edward Fitzpatrick, who heads up the U.S. rates unit at JPMorgan recently gave voice to this conventional wisdom when asked by Bloomberg about rising rates: "There are still hurdles, not the least of which is that they have to end the quantitative easing program before they would contemplate tightening," he said. "The Fed will have time to craft their message well."

When everyone in the market knows something, that's reason to be worried. Does the Fed really "have to" end QE before rates rise?

While this assumption seems well-grounded in both logic and in statements from several people inside the Fed (including Chairman Ben Bernanke himself), it's at least worth considering the possibility that that particular view of the future may not be as certain as Wall Street wise men think. We do not have a lot of history with the zero bound and QE, and so we should be wary of anyone who "knows" exactly what the exit strategy will entail.