can instead hold these excess reserves on deposit with the fed. because banks no longer seek to lend out their excess reserves, there is no increase in the amount of credit outstanding, no increase in economic activity and no risk that excessive credit creation will fuel an inflationary spiral. in the event that the ability to pay interest on excess reserves for any reason proved insufficient or the excess reserves themselves had unanticipated side effects that the fed wished to mitigate, we are developing a number of tools that can be used to drain reserves. two such tools are large reverse repos with dealers and other investors and term deposit facilities for banks. finally, the federal reserve could always drain reserves the old - fashioned way, by selling assets. the vast bulk of the fed ’ s portfolio is highly liquid – currently we hold $ 769 billion of treasury securities, $ 692 billion of agency mortgage - backed securities, and $ 131 billion of agency debt against about $ 900 billion of excess reserves. all the excess reserves could be mopped up by asset sales alone if that proved necessary. the federal reserve has been very aggressive in responding to the financial crisis. we have rolled out numerous new liquidity facilities and have engaged in lending activity under section 13 ( 3 ) of the federal reserve act for the first time since the great depression. these actions have been successful in mitigating the risks of financial collapse and a more severe contraction in economic activity. the financial system is now healthier and the economy is recovering. but despite these successes, we need to be clear that what has happened to our financial system and the economy is wholly unsatisfactory, and that a broad range of regulatory policies and practices need to be recalibrated to address the shortcomings of our financial system. with inflation low and long - run inflation expectations stable, and our ability to remove monetary accommodation in a timely manner intact, our near - term focus should be to keep significant monetary accommodation in place for an extended period in order to achieve our dual objectives of maximum employment and stable prices. thank you for your kind attention. i would be very happy to take a few questions.

this balance of risks is problematic because the current level of inflation is already so low – the core pce ( personal consumption expenditures ) deflator has increased only 1. 3 percent over the past 12 months. thus, we would not need much of a decline in inflation to run the risk of an outright deflation. outright deflation, in turn, would be a dangerous development because it would drive up real debt burdens and make it much more difficult for households and businesses to deleverage. so what are the implications of all this for monetary policy? the first implication is that the federal funds rate target is likely to remain exceptionally low for “ an extended period. ” the desired policy outcome is a robust recovery in the context of price stability. the second implication is that the federal reserve needs to ensure that market participants and the public understand that the fomc has the tools to exit smoothly from the very low federal funds rate, and that it stands ready to do so when the time comes. on this point, let me be perfectly clear : an enlarged balance sheet and the high level of excess reserves in the banking system will not delay or prevent a timely exit. the angst about the fed ’ s ability to exit smoothly stems from the rapid growth of its balance sheet over the past year. in september 2008, on the eve of lehman brothers ’ failure, the consolidated federal reserve balance sheet was about $ 900 billion. today it is about $ 2. 15 trillion, and it is likely to peak at around $ 2. 5 trillion early next year. some observers are concerned that this expansion will ultimately prove to be inflationary. proponents of this view say that the monetary base, the broad monetary aggregates, and total credit outstanding have historically tended to move together with inflation, at least over longer time periods. thus, if the monetary base is growing rapidly, as it has been over the past year with the growth in the fed ’ s balance sheet, the argument is that this growth will ultimately lead to inflation. this concern is not well founded because the federal reserve now has the ability to pay interest on excess reserves ( ioer ), and this tool allows us to prevent excess reserves from leading to excessive credit creation. it works as follows. because the federal reserve is the safest of counterparties, the ioer rate effectively becomes the risk - free rate. by raising that rate, the federal reserve raises the cost of credit because banks will not lend at rates below the ioer when they