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For the Fed, Mop Not Hike

Cleaning Up Excess Reserves Rather Than Raising Rates

Office workers are reflected on a screen displaying share prices, September 23, 2011. Daniel Munoz / Reuters

By the most recent forecast, the U.S. Federal Reserve is set to raise interet rates on December 16. That it’s happening in the midst of a global economic slowdown is bad news for markets and economies around the world. Even China’s yuan, which had remained stable alongside the strengthening U.S. dollar until recently, had to decouple from it in August to bolster the country’s faltering export industries; it was another decision that shook markets worldwide.

Federal Reserve Chair Janet Yellen has been warning of the coming interest rate hike for some time now. She wanted to sound the alarm sooner rather than later because the Fed has injected some $2.5 trillion in excess reserves—17.6 times more than the statutory reserves needed to support the present level of U.S. money supply and lending activity. When a central bank has created such an unprecedented degree of liquidity, particularly

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