When to start economic 'exit strategy'

An exit sign for economic recovery

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KAI RYSSDAL: As economists begin to at least consider the end of this recession, there's a new phrase that's starting to gain some traction. It's more familiar in a military context than economic. But it makes some sense if you think about it: Exit strategy. As in, how can the government work its way out of the extraordinary economic pump-priming that's been going on for a year or more now? It'll be a topic of conversation when the Federal Reserve meets next week.

And our Washington bureau chief John Dimsdale reports that when to start that exit is the crucial question.


John Dimsdale: The Federal Reserve has essentially been stomping on the gas pedal to try to keep the economic engine from sputtering. Once that engine starts to run on its own, too much gas will cause inflation. The Fed has to know when to start hitting the brakes.

Former Fed member Laurence Meyer says the timing of that maneuver is tricky.

Laurence Meyer: You can begin too soon and dampen the recovery, which needs to be very robust to bring that unemployment rate down. And of course you could tighten too late and have higher inflation as a result.

Meyer says the Fed has the tools to take money out of the system quickly. When the time comes, it can call in short-term loans and raise the interest rates. Some inflation-averse countries, like Germany, are already calling on the Fed to head for the exits. But others point to 1937, when the decision to tighten the money supply too soon after the Great Depression caused a recession. This year, there are no signs of an overheating economy.

But Wesleyan University's Richard Grossman says figuring out when to ease up on the stimulus is an art, not a science.

Richard Grossman: Even if there's an uptick in economic activity, is that the beginning of the recovery that could be inflationary? Or is that just a temporary blip and the next month the economic numbers won't look so good and we should therefore hold off on contractionary monetary policy?

In a speech earlier this week, Chicago Fed President Charles Evans said sometimes it takes more than good forecasting to know when to change policy.

Charles Evans: And a little bit of good luck would be nice, too.

In Washington, I'm John Dimsdale for Marketplace.

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