The Federal Reserve has no idea how to withdraw its monetary stimulus that has injected more than $1 trillion of excess reserves into the banking system, says economist Allan Meltzer.
“I believe we are headed for high inflation, not immediately, but later,” the Carnegie Mellon University economist said in testimony to Congress.
“The Federal Reserve has issued more than $1 trillion of excess reserves. It does not have a coherent, operational plan to reduce the excess,” said Meltzer, one of the country’s foremost scholars of the central bank.
Fed officials have said they can induce banks to hold on to most of the excess reserves by raising the interest rate on them.
As for how high the Fed would have to raise rates to keep banks from lending or investing their reserves, Meltzer says he has received no response from central bank officials.
“I suspect that the Federal Reserve does not know the answer,” he said.
“I do not doubt that at some interest rate, the banks will hold the excess reserves. I doubt very much that the interest rate is consistent with continued recovery and is politically acceptable.”
Economic guru Henry Blodgett doesn’t think much of the Fed’s idea, either.
Instead of increasing the excess reserve rate, “what the Fed should be doing is selling all of that mortgage junk they bought from Wall Street back into the economy,” he told Yahoo.
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