: excess reserves are currently 65 percent of the monetary base and rising. the only other time excess reserves as a percentage of the base have come anywhere close to this level was at the close of the 1930s, when the ratio hit 41 percent. we are in uncharted territory. to prevent excess reserves from fueling a too - rapid expansion of bank lending in an expanding economy, the fed will need to either drain reserves on a large scale by selling longer - term assets at a loss or provide inducements to banks to keep reserves idle, by offering interest on excess reserves at a rate competitive with what banks might earn on loans to businesses and consumers. or we might employ more widely new techniques we are currently testing, such as “ reverse repos ”, complex transactions in which we, in effect, borrow cash overnight from market operators while posting securities as collateral. such inducements to control the velocity of the monetary base might expose the fed to intense scrutiny and criticism. the big banks that park the lion ’ s share of excess reserves with us are hardly the darlings of public sentiment. raising interest payments to them while scaling back our remittances to the treasury might raise a few congressional eyebrows. and as to our repo operations, we have never implemented them on anywhere near the scale envisioned. of greatest concern to me is that the risk of scrutiny and criticism might hinder policymakers from acting quickly enough to remove or dampen the dry inflationary tinder that is inherent in the massive, but currently fallow, monetary base. in the parlance of central banking, the “ exit ” challenge we now face is somewhat daunting : how do we pass a camel fattened by trillions of dollars of longer - term, less - liquid purchases through the eye of the needle of getting back to a “ normalized ” balance sheet so as to keep inflation under wraps and yet provide the right amount of monetary impetus for the economy to keep growing and expanding? the first law of holes i have great faith in the integrity and brainpower of my fellow policymakers. i am confident that the 19 earnest women and men that make up the fomc will do their level best under chairwoman janet yellen ’ s leadership to accomplish a smooth exit that keeps prices stable and the economy in a job - creating mode. but my confidence will be bolstered if my colleagues adopt the first law of holes espoused in the late ’ 70s by then - british chancellor of the exchequer denis

important thing for me is that the committee began the process of slowing down the ballooning of our balance sheet, which at year - end exceeded $ 4 trillion. and we began – and i use that word deliberately, for we have more to do on this front – to clarify our intentions for managing the overnight money rate. as an economist would say, “ on net ” i was rather pleased with the decision taken at the december fomc meeting. under the chairmanship of ben bernanke, all 12 federal reserve bank presidents, together with the sitting governors of the federal reserve board, have input into the decision - making process. there is a formal vote – regardless of who is the fed chair – that includes only five of the 12 regional bank presidents plus the governors, but all of the principals seated at the table participate fully in the discussion of what to do. and yet, either because we will effect a change in the chairmanship starting in february or because at the last meeting we took the step of tapering back by a small amount our massive purchase of treasuries and mbs, great attention is being placed on the voters for 2014, of which i am one. two comments i recently read have been buzzing around my mind as i think about the many issues that will condition my actions as a voter. “ it ’ s alright ”, words and music by waylon jennings, copyright waylon jennings music, 1980. bis central bankers ’ speeches beer goggles … the first was by peter boockvar, who is among the plethora of analysts offering different viewpoints that i regularly read to get a sense of how we are being viewed in the marketplace. here is a rather pungent quote from a note he sent out on jan. 2 : “ … qe [ quantitative easing ] puts beer goggles on investors by creating a line of sight where everything looks good … ” for those of you unfamiliar with the term “ beer goggles ”, the urban dictionary defines it as “ the effect that alcohol … has in rendering a person who one would ordinarily regard as unattractive as … alluring ”. this audience might substitute “ wine ” or “ martini ” or “ margarita ” for “ beer ” to make it more age - appropriate, but the effect is the same : things often look better when one is under the influence of free - flowing liquidity. this is one reason why william mcchesney martin, the longest - serving fed chairman in our institution