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June 18, 2009

Pulling back the money

The Federal Reserve has pumped a tremendous amount of money into the economy in an effort to curtail the recession; however, is there a plan to pull this money back once the recession is over? And if so, how does it happen? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, there is a plan, and in fact, it's important there be such a plan because the fear is if that money is not pulled back when the economy is doing better, all that additional money will simply be absorbed by higher prices. That is, we will have more inflation. Now the Federal Reserve has signaled, already, in public statements that they know this is a threat, and they will work to pull that money back once they feel that the economy is on track and they can implement that. Now, how is that done? Well, actually the Federal Reserve would engage in something called open market operations. Actually, it's very simple. What the federal government would do would be to sell investments which it has in its portfolio - just like you and I might have some investments, some stocks or bonds - the federal government would sell investments in its portfolio to the public, and they would take back cash. So, the trade there is cash goes back to the Federal Reserve. Those investments go out to the investing community. Now you might say, What if people don't want to buy the Federal Reserve's investments? Well, the Federal Reserve will simply make the deal as sweet as they need to in order to implement that trade. So there is a plan to do this. It has been done in the past. The question is whether it can be done at the right time in order not to derail the economy but at the same time, to prevent higher inflation. That's a very, very tall order."

Posted by Dave at June 18, 2009 08:00 AM