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| Charles Plosser |
The way Charles Plosser sees it, the Federal Reserve is sitting on a ticking time bomb that could severely damage the economy unless the central bank reacts quickly to defuse the looming threat.
The Philadelphia Fed president, viewed as one of the bank’s leading hawks, is worried about some $2.5 trillion in “excess” reserves. That is, loanable funds available to individual or corporate borrowers through the nation’s banks.
The Fed has created these reserves through unpredented purchases of U.S. Treasurys and mortgage-backed securities, a strategy known as quantatative easing.
These reserves are just sitting in the bank system, basically doing nothing. That’s because demand for loans has been unusually weak amid an economic recovery that’s the slowest on record since the Great Depression.
“These reserves are not inflationary right now,” Plosser said in a meeting Tuesday with reporters in Washington.
Yet if borrowing begins to surge and those reserves start to pour out of the banking system, Plosser worries, “that’s going to put pressure on inflation.” The result: the Fed could be forced to raise interest rates faster and earlier than it would like and perhaps slam the breaks on the economic recovery.
The Fed tried to avoid such a problem in the past simply by not creating so much excess reserves in the first place. If the excess reserves did not exist, banks could not lend out too much money and trigger an inflationary spiral.
Read the full story: www.blogs.marketwatch.com
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