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Who will follow Bernanke in leading U.S. monetary policy?

Frank Bernanke’s term as Federal Reserve Chairman is about to draw to a close.  A Bush appointee, he has followed an aggressive expansion of bank reserves and the money supply, a policy that has the potential of leading to a substantial inflationary period.   Bernanke not only increased bank reserves through Open Market Operations, buying up massive amounts of U.S. government securities, he had the Federal Reserve make substantial purchases of many “troubled assets” such as mortgage -backed securities, through a policy known as quantitative easing (QE).  He has done this in several waves, first termed QE, then QE2, then QE3, and now we can only call it QE infinity or QE continuous.  Wikipedia provides a good description of quantitative easing here.

The only problem is it seems that Bernanke has increased bank reserves to such a point that banks are not loaning out these reserves and are instead just parking the funds, earning the meager interest that the FED has paid on reserves since 2009.  In such a situation, additional increases in bank reserves seem to have little effect on the money supply because banks are not lending out these excess reserves.  We can see what has happened to excess reserves here, at the St. Louis Federal Reserve Bank’s FRED data site, a great source for macroeconomic data.  If you notice, excess reserves are so huge that further expansions of reserves would likely have little effect on the money supply.  Remember, the multiplier expansion of the money supply comes when excess reserves get loaned out and are no longer excess reserves.  It seems that excess reserves are so massive that more reserves are not going to expand the money supply.

While I would like to see Frank Bernanke to stay on as Federal Reserve Chairman, it is really only because I want him to clean up his mess, to “vacuum” (he needs a monetary shop vac for this job) up those excess reserves he helped create.

The question now is who will follow Bernanke in the leadership spot at the Federal Reserve.  Here is a New York Times column by Binyamin Appelbaum and Annie Lowrey on the choice President Obama has in what are considered the two top contenders for the second most powerful job in the country.  Here is an article in the Financial Times by Richard McGregor about the Yellen vs. Summers choice  for Fed Chief.  Remember, the Federal Reserve is an independent agency, and their policy decisions do not have to be approved by the Congress or the President.   We will have with us whoever  he chooses for a long time to come.


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