FED Defends Ballooning Balance Sheet, Again ...

From today's WSJ:

"That flexibility could entail doing more to ease credit if the economy proves resistant to the monetary and fiscal stimulus now in train, or it could involve reversing actions to forestall potential inflationary effects of past action," Mr. Kohn said.

Of the Fed's existing facilities, its $300 billion longer-term Treasury securities program seems the likeliest candidate for an upgrade. The Fed has already said it will spend well over $1 trillion on mortgage-related debt if needed and its Term Asset-Backed Securities Loan Facility, or TALF, could reach as much as $1 trillion, though loans under that facility are only a fraction of that so far.

"The extremely large volume of purchases now under way does appear to have substantially lowered yields," Mr. Kohn said, in some cases by as much as a full percentage point. That reflects what he called "preferred habitat" behavior, meaning "long-term asset prices rise and yields fall as the Federal Reserve acquires a significant portion of the outstanding stock of securities held by the public."

Seeing how the Bernanke has loaded up the FED's balance sheet with billions of dollars of illiquid "AAA" assets, I am going to take this statements with a grain of salt. Fear not, there may be life at the end of the tunnel, and new article on VOX  claims the fears of inflation are overblown: the FED can take care of the inflation problem using by modifying their reserve interest-rate policy:

The Fed’s astoundingly large increase in reserves has many worried about future inflation and wringing their hands over exit strategies. This column argues that the Fed can control inflation by varying the interest rate it pays (or charges) banks on their reserve holding. Consequently, the Fed’s exit strategy need not be constrained by concerns about inflation – reserve interest-rate policy can take care of inflation, but the Fed should publically announce this policy.