Mr. Bernanke said the Fed had already done a great deal to help stimulate the economy -- like lowering its benchmark interest rate to virtually zero in December -- but that it still has "powerful tools" at its disposal. He argued that the Fed's approach is different from the quantitative easing policy used by the Bank of Japan from 2001 to 2006 and should be described as credit easing. Even though both methods involve the expansion of the central bank's balance sheet, the Fed's focus is on reducing credit spreads that are much wider in the United States now than was the case in Japan. In his remarks, Mr. Bernanke also sought to calm concerns that the Fed's actions will fan inflation by effectively printing money. Risks of inflation remain low in the near term, he said but added that once the credit markets begin to recover the Fed will have to unwind its lending programs. "*To some extent, this unwinding will happen automatically," he said, and short-term assets can just be allowed to "run off." Still, the Fed might hold on to some of the longer-term assets for a while, which could slow down efforts to shrink its balance sheet.
He argued that the Fed's approach is different from the quantitative easing policy used by the Bank of Japan from 2001 to 2006 and should be described as credit easing. Even though both methods involve the expansion of the central bank's balance sheet, the Fed's focus is on reducing credit spreads that are much wider in the United States now than was the case in Japan.
In his remarks, Mr. Bernanke also sought to calm concerns that the Fed's actions will fan inflation by effectively printing money. Risks of inflation remain low in the near term, he said but added that once the credit markets begin to recover the Fed will have to unwind its lending programs.
"*To some extent, this unwinding will happen automatically," he said, and short-term assets can just be allowed to "run off." Still, the Fed might hold on to some of the longer-term assets for a while, which could slow down efforts to shrink its balance sheet.
and yesterday the Economist was claiming that "The Federal Reserve weighs plans to unwind its unconventional stimulus":
A firefigher's first rule of survival is "know your way out". The same can be said of financial firefighting. Though it has no intention of exiting soon, the Federal Reserve is planning its path out from the extraordinary measures it has taken to free credit markets and boost demand.
Ordinarily, the withdrawal of reserves as the economy picks up would be an automatic process. And the breathless concern at the discovery that withdrawal of reserves will be needed would, ordinarily, be silly, since the FOMC can buy and sell Treasury securities at a much more rapid pace than the finance can be provided to expand the expenditure side of the expenditure-income loop. Ordinarily. But here is where the reckless policy of Bernanke to inject reserves by lending against and buying junk financial assets raises a serious concern, which is what happens when the normal operation of monetary policy would require selling financial instruments in order to withdraw reserves from the finance sector? ... What this means is that the US is at serious risk of not just inflation, but hyperinflation as capital inflows into the US collapse and we are forced to face our unsustainable structural current account deficit (averaging in excess of the average rate of GDP growth for over a decade).
Ordinarily.
But here is where the reckless policy of Bernanke to inject reserves by lending against and buying junk financial assets raises a serious concern, which is what happens when the normal operation of monetary policy would require selling financial instruments in order to withdraw reserves from the finance sector?
...
What this means is that the US is at serious risk of not just inflation, but hyperinflation as capital inflows into the US collapse and we are forced to face our unsustainable structural current account deficit (averaging in excess of the average rate of GDP growth for over a decade).
