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Strategies & Market Trends : Ride the Tiger with CD
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From: Rocket Red3/10/2013 1:45:51 PM
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While equity market bulls remain juiced up on U.S. Fed liquidity, the punch bowl will be removed at some point, which could lead to a sharp correction in stocks.

Looming ahead are major challenges for the U.S. Federal Reserve with its tricky exit policy. Already there is speculation that current Fed Chairman Ben Bernanke will not accept a third term in January 2014, leaving the central bank with a new leader at a very critical time.

Getting out of the current monetary policy accommodation phase will likely prove much more difficult than getting in. While the central bank has announced certain thresholds—a 6.5% unemployment rate and a 2.5% inflation rate—before it will consider shifting short-term interest rates, which have been at zero to 0.25% since December 2008, the timing will be of utmost importance, economists say.

If the Fed pulls the trigger on a rate hike too early—it could stall the already challenged U.S. economy. Or, if the Fed pulls the trigger too late, inflation expectations could become unhinged and leave the central bank chasing the economy with interest rate hikes. "No one inside or outside the Fed can predict how much instability we will have once the Fed starts hinting at reversing that accommodation," said veteran Wall Street Fed watcher David Jones, president of DMJ Advisors, a Denver-based consultancy.
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