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While there’s much in Fed policy to criticize over the past decade, there’s no need to overstate things. Right now, for instance, we see lots of talk that the Fed is monetizing the debt, which would be indistinguishable from money printing. In fact, it is money printing and risks a dangerous bout of inflation. But is that really what the Fed is doing? As Ben Bernanke said last month:
By buying securities, are you “monetizing the debt”–printing money for the government to use–and will that inevitably lead to higher inflation? No, that’s not what is happening, and that will not happen. Monetizing the debt means using money creation as a permanent source of financing for government spending. In contrast, we are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates. At the appropriate time, the Federal Reserve will gradually sell these securities or let them mature, as needed, to return its balance sheet to a more normal size. Moreover, the way the Fed finances its securities purchases is by creating reserves in the banking system. Increased bank reserves held at the Fed don’t necessarily translate into more money or cash in circulation, and, indeed, broad measures of the supply of money have not grown especially quickly, on balance, over the past few years.
Sure, that’s his story. But what about the claim that the “Federal Reserve purchased 77% of the net increase in the debt by the Federal government in 2011”? Economist David Beckworth puts the Fed’s bond buying in perspective with two facts of his own. First, the Fed overall holds just 15% of marketable treasuries as seen in the “All Years” category in the below chart.
Second, Beckworth notes, “while the Fed did purchase a large share of new treasuries in 2011, these purchases only returned the Fed’s share of total marketable treasuries to its pre-crisis level.”
To be sure, the Fed will need to unwind it balance sheet at some point, and that move will expose it to considerable political pressure if the economy is still subpar. That’s why communications and transparency are crucial — and why the central bank might want to adopt an explicit NGDP targeting rule to guide its actions.
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