And that’s my point: Because the Fed can pay interest on reserves, the size of its balance sheet does not, in and of itself, undercut the credibility of its commitment to keep inflation at 2 percent or a bit under.
I believe that’s why both survey and market-based measures of expected inflation over the next five to 10 years have remained remarkably stable as the Fed has expanded its liabilities. Unemployment remains disturbingly high at 9 percent. But – and this is important to keep in mind – it would likely be much higher without Federal Reserve interventions.