Today Ben Bernake outlined some of his plans for the Federal Reserve to start pulling in the massive amount of funds the Treasury pumped into the economy to prevent economic collapse.
In a talk with the House Financial Services Committee, he announced that the Fed would begin to raise the rates paid on bank’s excess reserves left with the Treasury, which would promote banks to give reserves back to the Treasury in return for interest payments on their deposits. The result of this action would be less cash available to lend out to businesses and individuals, and would results in higher interest rates for things like business loans and mortgages.
However, Bernake indicated to the House committee that he does not plan to implement these measures any time soon, given that the economy is still in a fragile state not only in country, but around the world. The issue of unemployment is still a huge factor in the overall recovery of the economy, and any significant progress in reducing it is still not forthcoming.
Bernake also indicated the risk of leaving the stimulus programs in place for too long. The massive amount of cash flow that was used to support faltering banks and companies around the U.S. would eventually lead to inflation if not brought back to the Treasury. Along with Bernake’s plan to raise the interest rates paid on reserves, he also introduced plans to raise the discount rate and allow banks to establish certificates of deposit, should faster action be required to halt inflation.
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