According to the WSJ, Ben Bernanke is expected to outline the Federal Reserve’s exit strategy this week. As expected (and discussed previously), the Fed plans to tighten monetary policy by increasing the interest rate on excess reserves. Otherwise, as the economy recovers and the excess reserve ratio declines, the money multiplier would rise and thus broader aggregates would rise as well. Given that there are currently over $1 trillion of excess reserves in the system, a failure of policy to tighten when the money multiplier begins to rise would result in rapidly increasing prices. As I previously discussed, the interest on reserves methodology is a rather crude way to solve the problem. If the problem is with excess reserves, then the reserves should be removed from the system using normal open market operations. So why isn’t the Fed employing this method? Well, I have long suspected that the reason the Fed was employing this strategy was because of the change in the composition in the Fed’s balance sheet away from traditional Treasury holdings and toward mortgage backed securities. This view is confirmed in the WSJ:
Discuss Bury
Discuss Bury
Interesting take on things.. It's about time someone told it like it...Obviously, the web doesn't account for the Roosevelt years. I do agree...The so-called Clinton economy hinged on the invention of the world-wide...10Q detective is one of the best....Good info....That would indicate the financial sector still has a major downside...I would hazard a guess that people are buying online rather than driving...Could this really be the bottom for the financials?...
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