Economist Cochrane: We Should Applaud the Fed for Keeping Big Balance Sheet

Monday, 25 Aug 2014 08:40 AM

By Dan Weil

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While most conservatives offer heavy criticism of Federal Reserve policy, John Cochrane, a finance professor at the University of Chicago, sees things a bit differently.

"As Fed officials lay the groundwork for raising interest rates, they are doing a few things right," he writes in The Wall Street Journal. "They need a little cheering, and a bit more courage of their convictions."

The central bank has built its balance sheet to $4.4 trillion through quantitative easing.

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

When it decides to raise interest rates, the Fed can simply boost the rates it pays on bank reserves, Cochrane says. It doesn't have to sell trillions of dollars of its assets to absorb trillions of dollars of those reserves

"The Fed's plan to maintain a large balance sheet and pay interest on bank reserves, begun under former Chairman Ben Bernanke and continued under current Chair Janet Yellen, is highly desirable for a number of reasons — the most important of which is financial stability," Cochrane writes.

"Short version: banks holding lots of reserves don't go under."

Meanwhile, CNBC contributor Ron Insana says that the Fed shouldn't rush to raise rates.

"Commodity prices have fallen sharply since the last Fed meeting, . . . housing is still struggling . . . and the global economy looks weaker than it did a month and a half ago," he writes on CNBC.com.

"It does not seem to me that, while the economy is much improved, a pre-emptive strike on phantom inflation would do the economy much good."

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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