"Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding.
We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively.", Chairman Ben S. Bernanke on "Federal Reserve's exit strategy" Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C. February 10, 2010
I think what is said is of prime importance, especially the following critical words:
- "raising short term rates"
- "at the appropriate time"
This could lead to many potential scenario, which I could quickly highlight without going into much details - Obvioulsy it is based on the fact that the ECB (European Central Banks) mirrors with a lag the behaviour of the US Federal Reserve:
Scenario 1: The economy show futher signs of strengh, it signals an "appropriate time" to remove policy accomodation, the consequence would be to "raise short term rates"
-> the Finnish housing market readjust sharply due to an overwhelming amount of default, linked to the fact that the mortgage market is mainly on short term variable rates, that leads to futher weaknesses in the banking sector that may need governmment rescue.
Scenario 2: It is not an "appropriate time" as the economy shows signs of weaknesses and need to be further supported by an accomodative policy which means that tightening will not occur and "short term interest rates will not be raised"
->The Finnish housing market readjust sharply as the economy deteriorate further amid rising unemployment and plummeting banking profit that ultimately questions the solvability of the entire banking sector which will ultimately require government intervention that could jeopardize its credit ratings.
Scenario 3: The economy neither weaken nor show signs of growth. The "appropriate time" to withdraw stimulus is extended futher in time and "short term interest rates" stays lows in a similar japanese deflationnary scenario of the 1990's
->The Finnish housing market deflate at a snail speed. In real term housing price do not budge but a low inflation slowly but surely reduce its value overtime. Like the air of a bike tire that is left in a cellar for a very long period, it slowly deflates.
Scenario 4: well all in pictures...
Legal note: what is said in this article should not be taken as an advise for any decision you make on any type of investment. It is highly advisable that you do not consult banks but instead use common sense when making a lifetime decision. This article purpose is to trigger a discussion if any, and gather different perspectives. Whatever is said in this article should not be taken seriously and this account for comments too.