There has been much speculation on what impact the government’s massive spending and lending programs will have on the economy and stock market, with fears of significant inflation at the forefront of the discussions. Today in The Wall Street Journal, Federal Reserve Chairman Ben Bernanke addressed those concerns, saying that he is confident the Fed has the tools it needs to sop up excess liquidity in the market when the time is right — though he thinks it will be a while before that time comes.
“My colleagues and I believe that accommodative policies will likely be warranted for an extended period,” Bernanke writes. “At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. … We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner. … We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability.”
The tools fall into two main categories: paying interest on reserve balances and taking various actions that reduce the stock of reserves. Among the specific measures are increasing the interest rate the Fed pays to banks holding money at the Fed; arranging large-scale reverse repurchase agreements with banks, government-sponsored enterprises, and other institutions; and having the Treasury sell bills and deposit the proceeds with the Fed, thereby increasing the Treasury’s account at the Fed and decreasing reserve balances.
To read Bernanke’s full explanation, click here.
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