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Federal Reserve beginning to pull back?

Many economists and observers want to see the Federal Reserve think up creative ways to pump more money into a sagging economy. Instead, it looks like they're coming up with creative ways to begin taking some of the money out:

The Federal Reserve on Monday proposed allowing banks to set up the equivalent of certificates of deposit at the central bank, a move that would help the Fed mop up money pumped into the economy and prevent inflation from taking off later.

Under the proposal, the Fed would offer "term deposits" that would pay interest. Doing so would provide banks with another incentive to park their money at the Fed, rather than having it flow back into the economy.

The proposal comes as no surprise. Federal Reserve Chairman Ben S. Bernanke and other Fed officials have repeatedly said the creation of "term deposits" -- essentially the equivalent of CDs for banks -- would be one of several tools the Fed could use to drain money from the economy when the time is right.

This is evidence, I guess, that they think the clock is readying to strike "right." It's not clear, however, exactly how fast they want to implement this program. The announcement that the Fed is thinking about fighting inflation can give comfort to inflation hawks even if it's not accompanied by any quick efforts to actually drain money out of the economy.

By Ezra Klein  |  December 29, 2009; 5:36 PM ET
Categories:  Economic Policy , Federal Reserve  
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Comments

I'm no expert, but Paul Krugman is, and he's been worrying/warning about the Fed being concerned about inflation, when they should be worrying about getting more money into the system. Based on his track record vs. Bernanke's, I'm going to conclude the Fed is going in the wrong direction (again).

http://krugman.blogs.nytimes.com/2009/11/16/the-madness-of-the-inflation-hawks/

http://krugman.blogs.nytimes.com/2009/11/25/no-exit/

Posted by: AMrE | December 29, 2009 5:58 PM | Report abuse

Krugman's track record? Surely you're mentioning that in jest. We need to sell another trillion worth of Treasuries next year just to fund stuff the last government didn't figure out how to pay for. The buyers don't exist. Which means we have to use Bernanke's magical printing press again. At some point, printing that much money causes inflation. Coming up with some scheme to hide the money isn't going to pull 100s of billions out of circulation.

http://www.zerohedge.com/article/guest-post-federal-reserve-still-doesnt-know-how-get-rid-excess-liquidity

Posted by: staticvars | December 29, 2009 11:39 PM | Report abuse

We'll only get inflation when wages and demand begin to rise. In the 1930s there was a huge pile of money sitting in T bills collecting 0.8% interest because wages were too low to spur demand and demand was too low to spur investment. The main risk is a new speculative bubble, but the pile of suckers is a lot smaller as wages are down and a lot of savers have been wiped out. I expect to see a few mini-bubbles, but nothing to do with the economy.

Posted by: earther | December 29, 2009 11:53 PM | Report abuse

The FED should fear that enough people will realize that the federal reserve is not even a federal branch bank, it is private(international bankers) that charge us the interest that when our government borrows, and fed should also fear after they were closed down twice trying to set up world banking in past history and finally snowed the people and our representatives and are even serving in our government now and got in again in 1913 , that they should fear that we the people may demand that we take back our banking and make our own money interest free through our government U.S. Treasury, we do not need the fed or want it, I believe they actually control but 5 countries, and U.S. was one they were afraid of(because of our powerful country at the time) before they accomplished taking over our monetary...we would be much much better off with healthcare and the power in our government offices would diminsh for democracy would prevail!!! We still have time but it is a must to get rid of FED and all that greedy power?? Why not, read history and it is plain as day!!!

Posted by: gfinmn | December 30, 2009 6:46 AM | Report abuse

Either the Fed is seeing much different GDP, CPI, and employment numbers than the rest of us are, or they've got their priorities completely out of whack.

Posted by: etdean1 | December 30, 2009 9:27 AM | Report abuse

I fear the same people who criticize Fed officials for having to think on their feet in the midst of the financial crisis now fault policymakers for planning ahead. Creating the infrastructure for term deposits at the Fed is an important preparatory step for an eventual exit strategy.

As Brian Sack, head of the New York Fed Open Market Desk, said in a speech earlier this month:

"It is important to underscore that market participants should not confuse the efforts to achieve operational readiness of these tools with a change in the stance of monetary policy. The mandate handed to the staff by the FOMC was to develop the tools in order to have them ready when needed, with no clear direction on when that time will come."

Posted by: dsaporta | December 30, 2009 3:01 PM | Report abuse

how many years, or decades, has it been since the Fed paid any attention to its "full-employment" mandate?

I actually assumed this provision had been repealed out of the charter until I saw Bernanke mention it in a congressional hearing somewhen this year (probably while getting ripped by Alan Grayson).

Posted by: rosshunter | December 30, 2009 4:58 PM | Report abuse

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