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Posted : 2010-02-15 14:24
Updated : 2010-02-15 14:24

Fed Plans to Wind Down $2.2 Tril. Stake

By Dale McFeatters
Scripps Howard News Service

The Federal Reserve Board faces a delicate task. Having pumped $2.2 trillion into the economy to fight the recession, it must start pulling that money back. It would have to sop up over half of that liquidity to get back to pre-recession levels.

The problem: Do it too quickly and the Fed might cut off or curtail the recovery. Wait too long and risk setting off a punishing round of inflation.

Ben Bernanke, as Fed chairmen typically do, gave only vague hints as to how he would accomplish that. In testimony never delivered to Congress because of this week's blizzard but released anyway, it was clear that whatever the central bank does, interest rates are going up.

He might begin by gently raising the Fed-regulated federal funds rate, currently near zero. That's the rate banks charge each other on overnight loans. Or he might make use of another tool, the excess reserves rate, now at 0.25 percent.

Raising that rate is an incentive for banks to park excess funds with the Fed rather than lend the money back out again. Unspoken is that giving banks a safe and profitable haven for their extra cash would dissuade them from making risky investments and perhaps launching another asset bubble.

To reassure Wall Street, Bernanke said rates will remain ``exceptionally low" and the inevitable move to tighten credit would come only ``after an extended period." Even those anodyne statements rattled the markets to a 20-point loss.

The ultimate goal is that over time, he said, the Fed's balance sheet ``will shrink toward more historically normal levels and that most or all of its securities holdings will be Treasury securities."

Ultimately, this will show up in higher rates on credit cards, consumer loans and, to some extent, mortgages. But this has an upside. Americans have terribly low savings rates, which is not good. The rates on savings accounts and certificates of deposits would go up as well.

If the government thinks Americans should save more, it should make it worthwhile for them to do so.

Dale McFeatters is an editorial writer of Scripps Howard News Service (www.scrippsnews.com).

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