Plan to mop up excess cash

To Inhibit Inflation, Fed Offers to Set Up Interest-Bearing Deposits


The Fed would create the equivalent of a certificate of deposit that pays interest to banks for keeping some of their reserves — which are currently estimated at more than $1 trillion — for up to one year. That would help offset some of the $2.2 trillion the central bank has fanned out into the economy during the financial crisis. It also would allow the Fed to quickly entice banks to take more money out of circulation in case inflation emerged as a serious threat in the near future.

The proposal was the latest sign the Fed is intensifying its efforts to scale back the vast amounts of money it pumped into the economy at the height of the crisis.

As the economy recovers, Fed officials worry that if banks keep too much cash tied up in reserves that might later lead to a boom in credit and result in inflation. Low interest rates and a weak dollar have raised concerns about rising prices, although the Fed chairman, Ben S. Bernanke, has said inflation is not a near-term danger.

Comment: Unsure how this would impact consumers.

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