One of the biggest concerns associated with all of the money being pumped into the system in the name of economic stimulus is inflation — or even hyper-inflation. Inflation can affect your personal finances in a very real way as costs rise and investment returns are eroded. With all of the cash being injected into the money supply, the value of our fiat currency becomes diluted, leading to inflation. Federal Reserve Chairman Ben Bernanke, however, is expressing confidence that inflation can be controlled.
In an op-ed piece today that appeared in the Wall Street Journal, as well as in testimony before Congress, Bernanke said that the Fed has the tools it needs to combat inflation and provide a “smooth” exit strategy from economic stimulus efforts. CNN Money reports Bernanke’s sentiments:
“We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner,” he said.
Chief among these 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.
In addition to raising rates, the Fed can also sell some of the long-term securities it is holding.
Of course, how you feel about this depends on whether you believe Bernanke can actually pull it off. Over time, some amount of inflation is unavoidable in scenarios of economic growth — especially when coupled with a fiat currency that is backed by nothing but promises and a general agreement that the money is “good”. However, the Fed (and other central banks) attempt to keep inflation to a an acceptable level so that it does not become an undue burden on the citizens of a country.
Do you think Bernanke’s exit strategy will work? Will we be able to avoid a large amount of inflation?
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