No one seems to care at the Fed about the gold supposedly backing up the gold certificates on the Fed balance sheet.
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The government has promised to help with a special issuance of Treasury bills which, through the machinations of reserve management, will result in a larger Fed balance sheet but no impact on interest rates.
With rates being near zero and the Fed s balance sheet already at an intractable level, the only viable solution to fight Ben s phantom deflation fear is for him to remove the impetus on the part of banks to keep their excess reserves laying fallow at the Fed.
Much of expansion is absorbed by non-monetary liabilities on the Fed's balance sheet.
Can the Fed unwind its balance sheet before inflation ravages the country?
The difference is that the 1979 move targeted money and, by implication, bank reserves, on the liability side of the Fed's balance sheet.
How curious that the Fed's balance sheet is in fact contracting.
The critics assume implicitly that all the expansion on the asset side of the Fed's balance sheet is offset by monetary liabilities, which simply isn't true.
Fed critics are focused on the rapid increase in the size of the Fed's balance sheet, but, as I've written here, much of that expansion is benign.
They cite the sharp increase in the size of the Fed's balance sheet and the recent expansion of bank reserves and money measures as prima facie evidence of looming inflation.
Significantly, with the Fed expanding its balance sheet, to keep all of us feeling more comfortable, and theoretically investing and spending, too, it may limit some effectiveness of any fiscal cliff agreement.
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In my opinion, there is little danger that nominal rates will outpace the increase in the rate of inflation until the Fed unwinds its balance sheet like it did under Paul Volcker 30 years ago.
These three sets of policy tools--lending to financial institutions, providing liquidity directly to key credit markets, and buying longer-term securities--have the common feature that each represents a use of the asset side of the Fed's balance sheet, that is, they all involve lending or the purchase of securities.
The Fed would contract its balance sheet by selling interest-bearing Treasury securities back to the public.
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Any moves by the Fed to shrink its balance sheet, thereby withdrawing liquidity from the real estate market, would add significant downward pressure to home prices.
During a question-and-answer period, Lockhart attempted to quell concerns for the Fed's hefty balance sheet by claiming he wasn't worried, and that its growth will not necessarily drive inflation, according to TradeTheNews.com.
The Fed will continue to expand its balance sheet not for months, but for years, for if the Fed stops while the government deficits rise, the service on the debt will crowd out spending for entitlements and other services.
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They worry that low interest rates and the Fed's large balance-sheet could nurture inflation expectations even when unemployment is high.
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All that the Fed really controls is its balance sheet, and the interest rate that it pays on bank reserves.
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To patch up the hole in its balance sheet the Fed would have to beg Congress or the U.S. Treasury for a bailout.
If the Fed insists on expanding its balance sheet far beyond the needs of the real economy, then it should allow the public to open (large) non-interest-bearing accounts at the Fed itself.
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The Fed has already expanded its balance sheet to epic proportions, while on Thursday ECB chief Mario Draghi announced a third bond buying plan that should help push down the borrowing costs of struggling peripheral nations, particularly Spain and Italy.
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Bernanke assures that the Fed can seamlessly unwind its unprecedented balance sheet expansion.
The Fed will therefore accelerate its rate of balance sheet expansion, easing monetary conditions further.
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In that event, the Fed would have to rapidly contract its balance sheet in order to avoid an inflationary outcome.
All of this having been said, the best solution would be for the Fed to simply reduce the size of its balance sheet.
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Indeed, the yen's previous rise partly reflects the Bank of Japan's reluctance to expand its balance sheet as much as the Fed, BOE, or the European Central Bank.
However, market onlookers are changing the shape of what they expect the Fed to deliver and rather than expanding their balance sheet, investors are sensing that the central bank might rejig the composition of its holdings in an effort to deliver borrowers with more attractive financing options.
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However, IOR is essential if the Fed is to have unlimited freedom to expand its balance sheet.
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