I'll get to his congressional testimony a little later in the day. But, in the meantime, the Journal op-ed includes some lucid explanations for two issues we keep returning to on The Stash. First, why the expansion of the Fed's balance sheet isn't currently inflationary even if it will be when the economy revives:
When the Fed makes loans or acquires securities, the funds enter the banking system and ultimately appear in the reserve accounts held at the Fed by banks and other depository institutions. These reserve balances now total about $800 billion, much more than normal. And given the current economic conditions, banks have generally held their reserves as balances at the Fed.
But as the economy recovers, banks should find more opportunities to lend out their reserves. That would produce faster growth in broad money (for example, M1 or M2) and easier credit conditions, which could ultimately result in inflationary pressures—unless we adopt countervailing policy measures.
Second, how paying interest on reserves held at the Fed puts a floor under short-term interest rates:
Congress granted us authority last fall to pay interest on balances held by banks at the Fed. Currently, we pay banks an interest rate of 0.25%. When the time comes to tighten policy, we can raise the rate paid on reserve balances as we increase our target for the federal funds rate.
Banks generally will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve. Moreover, they should compete to borrow any funds that are offered in private markets at rates below the interest rate on reserve balances because, by so doing, they can earn a spread without risk.
Thus the interest rate that the Fed pays should tend to put a floor under short-term market rates, including our policy target, the federal-funds rate.
In general, the theme of the op-ed was that we'll obviously need to tighten monetary policy at some point. But we have the tools to do that in an orderly way--and, in any case, that point is a pretty long way off. Sounds like the right note to me.
Or, put differently: While there's certainly no guarantee against a 1937-style premature tightening--Congress is such a wild-card that you can never be sure about the fiscal side--certainly the Fed has no intention of going there. Perhaps paradoxically, Bernanke seems to buy himself more time simply by explaining how he intends to tighten when that day comes, which I'm guessing was the point.
--Noam Scheiber