The Wall Street Journal’s Daily Report on Global Central Banks for Monday, March 10

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“The woods are still there—there are just fewer trees,” – former Fed Chairman Ben Bernanke.

HILSENRATH’S TAKE

At a policy meeting in June 2011, Federal Reserve officials agreed on a long-term plan to eventually exit sometime in the future from their unconventional monetary policies and return to its interest-rate-setting ways of the past. That plan is looking increasingly obsolete. The contours of a new plan are being debated within the Fed and slowly coming into shape.

Under the old plan, the Fed would take several steps to remove trillions of dollars it has pumped into the financial system. First it would let mortgage securities and Treasury securities mature and run off its balance sheet. Over a longer stretch it would sell mortgage-backed securities. Other technical tools – such as allowing banks to place deposits at the Fed for stretches – would further drain reserves in the financial system. Taken together these money draining moves would help to lift the Fed’s benchmark interest rate, the federal funds rate, as the supply of money in the system became scarcer. The Fed would also pay an interest rate on bank reserves to anchor rates where it wants them.

Under a new plan being considered, the Fed could leave excess reserves in the banking system for years and may never remove them.