The Fed's Exit Strategy

Last Updated Feb 11, 2010 3:14 PM EST

This is a discussion of the Fed's exit strategy announced today by Ben Bernanke. In particular, the video explains why the Fed has decided to increase the amount paid on reserves when it's time to start reversing policy rather than relying upon traditional open market operations to control the federal funds rate.

(Warning: Wonkish)

Update: Something I forgot to mention on the video is that controlling inflation is another reason for the Fed to increase the rate it pays on reserves as part of its exit strategy. When the rate the Fed pays on bank reserves increases, banks have less incentive to make loans (because the spread between what the bank can earn holding onto reserves and what it can earn loaning them out falls). If less bank loans are made, there won't be as much inflationary pressure. (Inflationary pressure can also be reduced through the sale of financial assets from the Fed's balance sheet using traditional open market operations.)

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