Thursday, February 11, 2010
No Fed Exit
"[Fed] Chairman Ben Bernanke has explained his exit strategy to prevent future inflation. ... The exit strategy is incomplete. Proponents are guilty of practising economics without prices. They never say what the interest rate on reserves must be to get banks to hold the approximately $1 trillion of reserves above the minimum they're legally required to hold. That's the critical question. ... No economist doubts that the Fed can induce banks to hold some more reserves by paying interest. But how much? ... When will inflation start? The date is uncertain. But the triggering event will be either a sustained increase in bank lending or a large increase in Fed purchases of government debt. Perhaps both. Either one would trigger a sustained increase in money growth", Alan Meltzer (AM) at the WSJ, 28 January 2010, link: http://online.wsj.com/article/SB10001424052748704375604575023632319560448.html.
AM, a professor at Carnegie-Mellon, is our leading monetarist now that Milton Friedman is gone. I agree with AM, the Fed has no exit. You've been warned.