Banks Could Cause Inflation But Doubtful They Will Loosen Lending. They Are Making Too Much From The Fed.

Fed's Charles Plosser: Excess Reserves Could Spark Inflation

Thursday, 22 May 2014 11:31 AM

By Dan Weil

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Banks have $2.5 trillion in excess reserves, and that money could push inflation dramatically higher if banks suddenly lend it en masse, says Philadelphia Federal Reserve Bank President Charles Plosser, a leading hawk among Fed policy makers.

The excess reserves were created by the central bank's quantitative easing, and much of it is deposited at the Fed.


"These reserves are not inflationary right now," Plosser told reporters Tuesday,MarketWatch reports. But if borrowing heats up, and the reserves suddenly get put to work, watch out, he said.

"That’s going to put pressure on inflation."

Consumer prices rose 2 percent in the year through April.

The Fed's difficult task is to withdraw the huge reserve surplus without hurting the economy.

"One thing I worry about is that if we are late, in this environment, with all these excess reserves, the consequences might be . . . more dramatic than in previous times," Plosser said. "If you study the Fed over the years, over its history, it's always behind the curve."

OppenheimerFunds CEO Bill Glavin thinks the Fed is "on the right track" in its tapering of quantitative easing. But if the Fed screws up its withdrawal of stimulus, the results will be dire, he told CNBC.

"We're all counting on the Fed threading the needle. I mean, it's not just for bond investors, frankly. It's for the world economy. If they're clumsy in their unwinding, that will spike rates and that will have very negative impacts on the global economy."



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