Lest you worry that the extra trillion bucks the Federal Reserve has pumped into the economy in the past year might mean inflation down the line, Fed Chair Ben Bernanke details some of his planned techniques for helping neutralize those bucks when the time comes. From a Reuters report:
Chief among [the Fed's inflation-busting plans] is the Fed's ability to pay interest on the reserves that banks hold at the Fed, Bernanke said. The interest rate the Fed pays on those reserves sets a floor under short-term rates.
If the Fed raises that rate, it can discourage banks from lending because banks will not want to lend money at rates lower than they can earn from the Fed, he explained.
Bernanke said the U.S. central bank also has other ways to raise short-term interest rates and limit the broad growth of money in the financial system.
For instance, it can arrange so-called reverse repurchase agreements with financial firms. The Fed would sell securities from its portfolio, taking cash out of the system, with an agreement to buy them back at a higher price at a later date.
The Fed could also offer "term deposits" similar to certificates of deposit to banks. Bank funds held at the Fed in such instruments would not be available for lending.
He also said the Treasury could issue securities and leave the funds on deposit with the Fed. Alternatively, he said the Fed could sell some of the securities it has accumulated.
He assures us, however, that the time to think about shrinking the money supply is still far in the future. Let us hope he manages to figure out when that proper time is correctly, or weep for every dollar you are stuck with.