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Why the Federal reserve wants to drain excess reserves

By Implode-Explode Heavy Industries

"I wrote a post yesterday (The Fed?s exit strategy) to explain the mechanics surrounding Monday?s Federal Reserve announcement that it is offering CD accounts to banks. The Federal Reserve does not control the demand for credit and therefore cannot increase aggregate demand by increasing bank reserves. This is an important point because it colors how you view the potential for inflation as a result of Fed action. I see little need for immediate inflation concerns because there is huge amounts of excess capacity."

Full post as published by Mortgage Lender Implode-o-Meter on December 31, 2009 (boomark / email).