Locking up bank reserves is wrong policy focus
– John Kemp is a Reuters columnist. The views expressed are his own. —
Plotting an exit strategy and shrinking the Federal Reserve’s balance sheet has become a hot topic as policymakers try to underscore their commitment to price stability and markets ponder the risk of inflation.
But micro-managing the reserve base is a curiously inadequate way to respond to medium-term concerns about inflation. Interest rates (the cost of credit) and supervision (leverage) are broader, more appropriate tools.
It is irrelevant whether the Fed sells its assets back to the market. What matters is whether and when the central bank is prepared to raise the price of borrowing.
A NEW STORYLINE
Federal Reserve Chairman Ben Bernanke is expected to use his testimony to the House Financial Services Committee on Wednesday to outline plans for taking back some of the liquidity it injected during the crisis.
There is no suggestion the Fed wants to start reducing liquidity straight away. Rather the central bank hopes a credible plan for reducing it later will head off fears about inflation and keep bond rates and borrowing costs down.
The fed had better raise interest rates soon, because a there are a growing number of us with a lot of cash in the banks that are getting sick of letting everyone use our money for next to nothing in interest. What if we all withdraw it until we get better rates?? For every $1mil I have in the bank I control $10Mil in lending.