Tags: Banks | trillion | reserves | borrowers | federal reserve | Chairman | Ben Bernanke

How Bernanke Expects to Stop Inflation Cold

By    |   Tuesday, 22 Dec 2009 02:49 PM

Banks have $1 trillion in reserves that probably won’t get allocated to borrowers, says Federal Reserve Chairman Ben Bernanke.

The reserves come from the $1 trillion the Fed has injected into the banking system through its purchase of mortgage securities.

“So, as we purchase $1 trillion of mortgages, we've created roughly $1 trillion of reserves that banks hold at the Federal Reserve,” Bernanke told Time magazine, which named him person of the year.

“The banks, at this point, are just willing to hold those reserves with the Fed, and not do anything with them.” That’s because they’re afraid that borrowers wouldn’t be able to pay them back.

“Ultimately, if the economy normalized, and the Fed took no action, the banks would take those reserves, try to lend them out, and they would begin to circulate,” Bernanke says. “The money supply would start to grow.”

But that would create an inflationary risk. “Therefore, as the economy begins to recover, and as we move away from this very weak economic environment, the Federal Reserve is going to have to pull those reserves out of the system,” he says.

Some economists say the Fed will raise interest rates as early as next year. Former Fed Vice Chairman Alan Blinder says it may happen by June, according to The Wall Street Journal.

Northern Trust economist Paul Kasriel told the paper: "They're going to have to get aggressive, and they know that.”

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Banks have $1 trillion in reserves that probably won t get allocated to borrowers, says Federal Reserve Chairman Ben Bernanke. The reserves come from the $1 trillion the Fed has injected into the banking system through its purchase of mortgage securities. So, as we...
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2009-49-22
Tuesday, 22 Dec 2009 02:49 PM
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