The Great Inflation Debate
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The Federal Reserve responded aggressively to the economic crisis with unconventional monetary policy measures. These measures have vastly expanded the size of the Fed’s balance sheet, leading to concerns over future inflation. Chairman Ben Bernanke has argued that the Fed has the tools to fight any uptick in inflation; for example paying interest on reserves. But it is not only the size of the Fed’s balance sheet that has changed; its composition has changed as well. As the chart above illustrates, the Fed is now holding riskier assets, such as mortgage backed securities, that may prove difficult to unwind in a timely fashion.
Krugman: The Big Inflation Scare
Bernanke: Semiannual Monetary Policy Report to Congress
Economist: Inflation Is Bad, But Deflation Is Worse
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