The real tightening will come when the monetary base declines.
Raising interest rates is just another boondoggle.
* * * * * J B K * * * * *
San Francisco
Bernanke said "one possible sequence" of the exit strategy involves first testing tools for draining reserves "on a limited basis." Then, "as the time for the removal of policy accommodation draws near, those operations could be scaled up to drain more significant volumes of reserve balances to provide tighter control over short-term interest rates," he said.
'Firming' Policy
The Fed would then execute the "actual firming of policy" by raising the interest rate on bank reserves, Bernanke said. Congress granted the Fed the power in October 2008 as part of the law creating the $700 billion Troubled Asset Relief Program.
"Changes in the interest rate will be broadly telegraphed," said Anthony Crescenzi, senior vice president at Pacific Investment Management Co. in Newport Beach, California, which runs the world's biggest mutual fund. "The first thing that will happen is that there will be a language change, taking 'extended period' out" of the Fed's public policy statement.
"By the time we see scaled-up operations" to drain reserves, "they will seem like an afterthought," Crescenzi said.
http://www.bloomberg.com/apps/news?pid=20601068&sid=aAd6B9SHcOzo
