Indeed, in a 2006 speech about the historic use of monetary aggregates in setting Federal Reserve policy, Chairman Bernanke pointed out that, “in practice, the difficulty has been that, in the United States, deregulation, financial innovation, and other factors have led to recurrent instability in the relationships between various monetary aggregates and other nominal variables.” 3 Still, my colleagues and I will be monitoring a wide range of financial and economic developments very closely – including the growth of the money supply, inflation, and many other financial and nonfinancial variables – and, based on a full assessment of those developments, the FOMC will withdraw monetary accommodation at the appropriate time.
My view is that the elevated reserve balances would be inflationary only if they prevented the FOMC from effectively removing monetary accommodation by raising interest rates when the time comes to remove such accommodation, and I am convinced that that will not be the case. The FOMC has a number of tools at its disposal for raising interest rates.