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The Fed's Next Move Is A Delicate One

STEVE INSKEEP, HOST:

Leaders of the Federal Reserve meet today in Washington. They oversee an institution that, among other things, creates money. They've created a lot of it in the years since the financial crisis, adding more than $3 trillion. One of the Fed's next jobs is to make that money disappear. Here's Jacob Goldstein of NPR's Planet Money team.

JACOB GOLDSTEIN, BYLINE: Creating all that money was part of a program called quantitative easing. The Fed used the money to buy bonds and pushed down interest rates on things like mortgages to encourage people to borrow and spend. Today, the crisis has passed, but all that money is still out there, largely in one place.

ALAN BLINDER: Surprisingly - very surprisingly - basically all of it went to idle cash in the bank.

GOLDSTEIN: This is Alan Blinder. He was vice chairman of the Fed back in the '90s. He says one goal of creating all that money was to get banks to lend more. That really hasn't happened yet.

BLINDER: You can ask me - the next question is how come banks haven't reached this point already? And my answer is, damned if I know- it's a puzzle to me.

GOLDSTEIN: The economy will start humming again at some point. Banks will start lending out all that money, and if that happens too fast, it could be a problem. Inflation could take off. To be clear, that hasn't happened yet. Inflation is still low. Eventually, though, Fed officials will start destroying the money they created, start winding down quantitative easing. But figuring out exactly when to do this is fraught. Do it soon, you plunge the economy back into another recession. Wait too long, and inflation takes off.

BLINDER: What the Fed is worrying about every minute of every day is getting the timing right. So that is exactly the art of the exit - getting the timing right.

GOLDSTEIN: The Fed always worries about this. But right now, Blinder says, there's so much money out there that even a small misjudgment could have big consequences. On top of that, the Fed has never done this before. David Blanchflower was at the Bank of England during the financial crisis. He says the Fed did the right thing with quantitative easing. But he says during the crisis, central banks were making it up as they went along, and they're still making it up now.

DAVID BLANCHFLOWER: They don't have a nice chapter in a textbook to tell them what they should do. They've never done it before. They're struggling.

GOLDSTEIN: So the Fed doesn't know what's going to happen when they finally wind down QE?

BLANCHFLOWER: Absolutely not. Sorry. They absolutely don't know.

GOLDSTEIN: That sounds terrifying.

BLANCHFLOWER: It is - it is terrifying.

GOLDSTEIN: The Fed has laid out a basic plan. First, raise short-term rates. That's the part everybody's talking about at today's meeting. Then, when the economy seems strong enough, start slowly pulling that QE money out of the economy. Blanchflower says it's likely to be years before things are back to normal. Jacob Goldstein, NPR News. Transcript provided by NPR, Copyright NPR.

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