If policymakers fail to manage the large volume of reserve balances, it could make it more difficult for the Fed to raise short-term rates when recovery begins, Federal Reserve Board chairman Ben S. Bernanke said Friday.
“The large volume of reserve balances outstanding must be monitored carefully, as — if not carefully managed — they could complicate the Fed’s task of raising short-term interest rates when the economy begins to recover or if inflation expectations were to begin to move higher,” Bernanke told a Federal Reserve Bank of Richmond symposium, according to prepared text released by the Fed.
Calling the Fed’s deploying of it balance sheet “creative,” Bernanke added: “We have done so prudently. As much as possible, we have sought to avoid both credit risk and credit allocation in our lending and securities purchase programs.”
