WASHINGTON — When the financial system was teetering, Federal Reserve Chairman Ben Bernanke flooded it with trillions of dollars to save the banks and free up credit for consumers and businesses.
Looming in the future is a high- risk challenge for the economy’s rescuer-in-chief: He will have to mop up that money without disrupting a nascent recovery.
And timing is vital. Act too fast, and Bernanke risks choking off lending to businesses and everyday Americans. Wait too long, and he risks setting off crippling inflation.
“We are in such an unusual situation,” said Lyle Gramley, a Fed member in the early 1980s and now chief economic strategist at Soleil Securities. “The Fed will have a more difficult set of decisions to make.”
Assuming he manages to help usher in a sustained recovery, Bernanke, like his predecessors, will eventually face still another challenge: He will be under enormous political pressure to keep interest rates low, even though that could speed inflation.
But the Fed chief will face no task with quite the peril of withdrawing the trillions the Fed has pumped into the financial system in ways that had never been envisioned.
Some analysts think it could take four to five years for the Fed to withdraw the money entirely and shrink a balance sheet that is about $2 trillion, more than double what it was when the financial crisis struck.
Already, the Fed has taken baby steps.
It has said it will allow one program intended to support money- market mutual funds — one that hasn’t even been used — to expire Oct. 30. It has also reduced the maximum it will lend to banks under two other programs.
Thomas Hoenig, the Kansas City Fed president whose region includes Colorado, is hosting Bernanke and dozens of other central bankers at an annual symposium in Jackson Hole, Wyo., which began Thursday.
Hoenig said he hopes the gathering will serve as a model for handling crises in the future.
Bernanke has urged Congress to back part of Hoenig’s proposal for dealing with faltering big banks, which would wipe out shareholder equity in any that receive government aid. The Treasury Department’s so-called resolution authority plan, while likely to result in stockholder losses, doesn’t require it.
“Tom is leading the mainstream on this,” said Gramley. “He’s ahead of the curve.”
