Yellen, Guidance, and the Exit Strategy

Abstract

Five years into the tepid recovery following the global financial crisis, the Fed was tapering its quantitative easing policy. When should it take another step toward normalizing U.S. monetary policy by greatly reducing its holdings of U.S. Treasury bonds? Federal Reserve Board Chair Janet Yellen faced this question in summer 2014, even as she was concerned that the U.S. economy was still on a weak footing. Suitable for both core and elective MBA courses in global financial markets and international finance, this case examines the risks associated with a policy some would consider monetizing the budget deficit. Students consider the factors behind past, current, and prospective levels of U.S. long-term interest rates.This case was written as an updated version of “Bernanke's Dilemma” (GEM-0111) and may be used in its place. Excerpt UVA-GEM-0121 Jun. 9, 2014 Yellen, guidance, and The Exit Strategy [N]o central bank anywhere on the planet…has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank—not, at least, the Federal Reserve—has ever been on this cruise before. —Richard W. Fisher, President and CEO, Federal Reserve Bank of Dallas Confused Delivery Distracts from Fed's Main Message . . .