the reserves held by banks and thus in the narrowest definition of the money supply, the monetary base. 1 however, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the fed. consequently, the rates of growth of broader monetary aggregates, such as m1 and m2, have been much lower than that of the monetary base. 2 at this point, with global economic activity weak and commodity prices at low levels, we see little risk of unacceptably high inflation in the near term ; indeed, we expect inflation to be quite low for some time. however, at some point, when credit markets and the economy have begun to recover, the federal reserve will have to moderate growth in the money supply and begin to raise the federal funds rate. to reduce policy accommodation, the fed will have to unwind some of its credit - easing programs and allow its balance sheet to shrink. to some extent, this unwinding will happen automatically, as improvements in credit markets should reduce the need to use fed facilities. indeed, where possible, we have tried to set lending rates and other terms at levels that are likely to be increasingly unattractive to borrowers as financial conditions normalize. in addition, some programs – those authorized under the federal reserve's socalled 13 ( 3 ) authority, which requires a finding that conditions in financial markets are " unusual and exigent " – will, by law, have to be phased out once credit market conditions substantially normalize. however, the principal factor determining the timing and pace of that process will be the federal reserve's assessment of the condition of credit markets and the prospects for the economy. a significant shrinking of the balance sheet can be accomplished relatively quickly, as a substantial portion of the assets that the federal reserve holds – including loans to financial institutions, temporary central bank liquidity swaps, and purchases of commercial paper – are short - term in nature and can simply be allowed to run off as the various programs and facilities are scaled back or shut down. as the size of the balance sheet and the quantity of excess reserves in the system decline, the federal reserve will be able to return to its traditional means of making monetary policy – namely, by setting a target for the federal funds rate. importantly, the management of the federal reserve's balance sheet and the conduct of monetary policy in the future will be made easier by the recent congressional action to give the fed the authority to pay interest

each other. a ccp faces market or credit risk only in the event that one of its members defaults and its required initial margin or other pre - funded financial resources are insufficient to cover any adverse price swings that occur during the period between the time of default and the time that the ccp is able to liquidate the defaulting party ’ s positions. however, like most other financial intermediaries, ccps do face liquidity risks. their business model is based on timely payments and the ability to quickly convert either the underlying assets being cleared or non - cash collateral into cash. for this reason, ccps should carefully consider liquidity when launching new products and only offer clearing of products that can be sold quickly, even in times of stress. liquidity problems can occur in central clearing even if all counterparties have the financial resources to meet their obligations, if they are unable to convert those resources into cash quickly enough. the amount of liquidity risk that ccps face can sometimes dwarf the amount of credit or market risk they face. this is particularly true for the clearing of cash securities such as treasuries. in that case, the securities being cleared are extremely safe and likely to rise in value in times of stress. but in contrast to most cleared derivatives, the cash payments involved are very large because counterparties exchange cash for the delivery of the security on a gross basis. i will look at these risks from two perspectives, first in terms of the payments that ccps must make, and then in terms of the payments they expect to receive. payment flows from ccps in the case of a member ’ s default, a ccp must be equipped to make the cash payments owed to non - defaulting counterparties when due. this requirement can be met as long as there is sufficient margin, mutualized resources such as the guarantee fund, or the ccp ’ s own resources held in cash and in the required currency. but if those funds are held in securities, then the ccp will need to convert them to cash, either by entering into a repurchase agreement, or using them as collateral to draw on a line of credit. and if the ccp holds either cash or securities denominated in a currency different from the one in which payment must be made, it will need to either engage in a spot fx transaction or in an fx swap. principle seven of the pfmi addresses these liquidity risks, calling for all ccps to meet a “ cover