The Federal Reserve's Exit Strategy : Looming Inflation or Controllable Overhang?

Many economists and economic commentators fear that the Federal Reserve does not have an adequate exit strategy from the quantitative easing that took place during the financial crisis. Its bloated balance sheet has allegedly left a looming monetary overhang that the Fed will not be able to manage once the economy returns to normal. Interest rates will rise, banks will increase their loans, reserve ratios will fall, and money multipliers will rise, all unleashing very high inflation. Caught off guard, the Fed will neither accurately foresee nor easily offset this process. I argue that this fear is exaggerated. The Fed has four new or expanded tools?loans from the Treasury, reverse repurchase agreements, interest on reserves, and term deposits?with which it can restrain inflation without resorting to traditional open market operations. Indeed, a greater danger is that the Fed's exit strategy will involve no significant reduction in its balance sheet