Economic Policy Papers are derived from policy-oriented research generated by Minneapolis Fed staff and specialists. The documents are a periodic show for a basic market. The views expressed here are the ones of this writers, not always those of other people within the Federal Reserve System.

Executive Overview

Banking institutions in the usa have actually the prospective to boost liquidity unexpectedly and significantly—from $12 trillion to $36 trillion in money and simply accessed deposits—and could thus cause inflation that is sudden. This will be feasible due to the fact nation’s fractional bank system permits banking institutions to transform extra reserves held during the Federal Reserve into loans from banks at in regards to a ratio that is 10-to-1. Banking institutions might take part in such transformation when they think other banking institutions are going to achieve this, in a fashion just like a bank run that produces a self-fulfilling prophecy.

Policymakers could protect well from this inflationary possibility by the Fed offering monetary assets it acquired during quantitative easing or by Congress notably raising book demands. Read more