Thus far, much of the money we have pushed out into the economy has been stored away rather than expended to the desired degree. For example, we have seen a huge buildup in the reserves of the depository institutions of the United States. Less than a fifth of commercial credit in the highly developed U.S. capital markets is extended through depository institutions. Yet depository institutions alone have accumulated a total of $ trillion in excess reserves – money that is sitting on the sidelines rather than being loaned out into the economy. That’s up from a norm of around $ billion before the crisis. The Fed’s large-scale asset purchases dramatically and more broadly impacted credit markets. The U.S. credit markets are awash in liquidity. BIS central bankers’ speeches  1  As of March 14, our par holdings of fixed-rate MBS exceeded 30 percent of the outstanding stock of those securities. Through these purchases, we have driven down mortgage rates and helped rekindle the U.S. housing market. We now own just shy of 24 percent of the stock of Treasury coupon securities. Having concentrated our purchases of Treasuries further out on the yield curve, and done so in size, we have driven nominal interest rates across the credit spectrum to lows not seen in over a half century.
We will feel the stones of the economy with the bottoms of our feet as central bankers and proceed accordingly. Draghi’s Old Man At a recent meeting I attended in Frankfurt, Mario Draghi of the European Central Bank told of a man who needed a heart transplant. The doctor leveled with him that he had several choices, including the heart of a 75-year-old central banker. “I’ll take that one,” the man answered immediately. “Why?” the doctor asked. “Well,” said the man, “because it’s never been used.” As was made clear in Chair Yellen’s speech in Chicago earlier this week, central bankers have hearts, and the Fed is working to harness monetary policy to relieve the plight of the cyclically unemployed. But we also need to be vigilant in making clear that we are obligated to maintain price stability and that allowing inflation to take grip is a cardinal sin for a central bank, for it is the cruelest of afflictions for all of society. Joachim Fels of Morgan Stanley noted that Draghi’s little joke serves as a reminder not that my colleagues and I at the Federal Reserve belong to a heartless tribe but that “central banking is about making rational, cool-headed and unemotional decisions often under difficult circumstances” 7. We must conduct monetary policy in a cool-headed and unemotional manner in order to achieve both of the mandates Congress has given us – preserving price stability and achieving full employment – while avoiding financial market turbulence.