FRB: Speech--Bernanke, Federal Reserve Policies to Ease Credit and Their Implications for the Fed's Balance Sheet--February 18, 2009:
"We live in extraordinarily challenging times for the global economy and for economic policymakers, not least for central banks such as the Federal Reserve. As you know, the recent economic statistics have been dismal, with many economies, including ours, having fallen into recession. And behind those statistics, we must never forget, are millions of people struggling with lost jobs, lost homes, and lost confidence in their economic future.....Traditionally the most conservative of institutions, central banks around the world have responded to this unprecedented crisis with force and innovation"
He goes on to explain what the Fed has done and why. For instance:
"Policy innovation has been necessary because conventional monetary policies, which focus on influencing short-term interest rates, have proven insufficient to overcome the effects of the financial crisis on credit conditions and the broader economy. To further ease financial conditions, beyond what can be attained by reducing short-term interest rates, the Federal Reserve has taken additional steps to improve the functioning of credit markets and to increase the supply of credit to households and businesses--a policy strategy that I have called "credit easing"
He also addressed a fear that "easy" money will lead to inflation.
"Some observers have expressed the concern that, by expanding its balance sheet, the Federal Reserve will ultimately stoke inflation. The Fed's lending activities have indeed resulted in a large increase in the reserves held by banks and thus in the narrowest definition of the money supply, the monetary base. However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed. Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much lower than that of the monetary base. At this point, with global economic activity weak and commodity prices at low levels, we see little risk of unacceptably high inflation in the near term; indeed, we expect inflation to be quite low for some time. However, at some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to moderate growth in the money supply and begin to raise the federal funds rate. To reduce policy accommodation, the Fed will have to unwind some of its credit-easing programs and allow its balance sheet to shrink."This is an excellent read. Dare I say required for any Institutions or Money&Banking class?
BTW Does anyone have video or audio of this? (Thanks anonymous!)
The video (about 24 minutes) is here.