Thorburn, this q of whether the unwinding of QE will cause inflation keeps coming up, I mean Greenspan said it would, for instance, but so far it just hasn't happened...last week i read a piece in the AFR that indicated that the tipping into the economy (through bank lending) of '2 trillion $ excess banking reserves on deposit at the Fed' would definitely cause inflation, IF the tipping bit occurs.
This inflation can only be avoided (said the article) by:
1. inc the interest rates those funds get so that banks get a better return leaving them with the Fed (can the Fed afford this?)
2. sell longer term mortgage backed securities to reduced these excess reserves (isn't that partly what caused the GFC in the first place? Those lovely mortgage-backed securities)
3. Raise the reserve that banks are required to hold at the Fed, so banks have less to lend.
This last one is the option Ben is taking isn't it? Hasn't the Fed imposed very onerous reserve requirements that go beyond Basel III requirements, and indeed is leading to reduced lending? The Fed seems to be trying to drive a very fine line here, because lending is critical for a working economy....
