There are perceptional risks, for example. Our duty is most distinctly not to monetize―or even be perceived as monetizing―the debt of fiscally imprudent government. Throughout the history of nations, monetizing the budgetary excesses of governments has proven to be a direct path to economic perdition. Having already peeked inside that door, I feel strongly that we must now shut it, lock it and throw away the key.

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Continued accommodation presents significant risks. In my view, no amount of further accommodation by the Fed would be wise—either by prolonging or “tapering off” the volume of purchases of Treasuries past June, or adding another tranche of large-scale asset purchases. Indeed, it may well be that we should consider curtailing what remains of QE2.

Now, we at the Fed are nearing a tipping point. Just as we pressed on in doing our duty through extraordinary, exigent measures, we must now discipline ourselves to just as persistently normalize our operations in a timely way.

I have no intention of supporting, under political pressure, the monetizing of the debt.. [That would be] a central banker’s cardinal sin.

REP. RYAN:  It seems to me that the argument here is that the intention of QEII is what we ought to be focusing on because the intention is to bring rates down through economic growth, and therefore, the intention is what should matter here. But this is debt monetization. So isn't that really a distinction without a difference?

MR. BERNANKE: No, sir. If monetization would involve a permanent increase in the money supply to basically pay the government's bills through money creation, what we're doing here is a temporary measure, which will be reversed so that at the end of this process, the money supply will be normalized. The amount of the Fed's balance sheet will be normalized and that there will be no permanent increase either in money outstanding, in the Fed's balance sheet or in inflation.

The entire FOMC knows the history and the ruinous fate that is meted out to countries whose central banks take to regularly monetizing government debt. Barring some unexpected shock to the economy or financial system, I think we have reached our limit. I would be wary of further expanding our balance sheet

In sum, I asked that the FOMC consider that we might be prescribing the wrong medicine for the ailment from which our economy is suffering. Liquidity and abundant money are not the binding constraints on the economic activity we wish to see. The binding constraints are uncertainty about income and future aggregate demand, the disincentives fiscal and regulatory policy impose on ridding decisionmakers of that uncertainty, and the reluctance, given those disincentives, of those who have the power to create jobs for our people to invest in undertakings that would create them.

The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed. I could not state with conviction that purchasing another several hundred billion dollars of Treasuries—on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities—would lead to job creation and final-demand-spurring behavior. But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed.

My perspective, as with those of all other members of the FOMC, was given a thoughtful and fair hearing at the table. After deliberation, the majority of the committee concluded that under current and foreseeable conditions, the better approach was to purchase $600 billion in Treasuries between now and the end of the second quarter of next year, on top of the amount projected to replace the paydown in mortgage backed-securities. The math of this new exercise is readily transparent: The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt.

This is risky business. We know that history is littered with the economic carcasses of nations that incorporated this as a regular central bank practice. So how can the decision made last Wednesday be justified?

Our holdings of Treasury securities today are about the same as they were before the crisis. We have not monetized the debt and we will not. And we will, of course, continue to make sure that price stability is central to our objectives. So let me just assure on that point.

Let me just add parenthetically that given the structure of our debt, it wouldn't even help -- you know, it wouldn't even help reduce the debt is -- again, we will not do this. But given that so many of our obligations are either short-term or indexed or are real obligations such as medical obligations or Social Security obligations, which are indexed, it wouldn't have a substantial affect even if -- you know, if there were willingness to do that, which of course, there is not.

So there really is no alternative but to try to find real solutions and inflation is just not an answer -- either for economic reasons and just because it wouldn't even affect the balance very much.

We purchased last year $300 billion in Treasuries, which was much less than 80 percent, and that total number brought us back to 790 or so billion, which is about where we were before the crisis. 

So at this point the Fed owns the smallest share of U.S. government as it had for many, many years. We are not monetizing the debt, and we have no immediate plans to do so in the future.

In response to a question about a market report stating that the Fed had bought 80% of the debt issued by the government.

A glance at history shows that many countries with massive structural deficits and without an independent central bank turned to the printing press to pay off their debts. That’s a recipe for high inflation and, in some cases, hyperinflation.

But I don’t believe the United States faces that threat. Looking back in history, runaway fiscal deficits have often been accompanied by high inflation.F7F But, since World War II, such a relationship has only held in developing countries.F8F In countries with advanced financial systems and histories of low inflation, no such connection is found.

We've got very large fiscal deficits. We've got the appearance...that the Fed is monetizing the deficit, pushing up yields. Anything that is going to erode the independence of the Fed is going to feed that expectation and drive yields higher.

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So I think we are really in a delicate situation here as regards the independence of the Fed, and that is an important consideration going forward.

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The Congress has thought over the last 100 years about how much independence to give the central bank. And when they really think about it, at the end of the day, they want the level of independence that we have. And so I think that will be the end outcome of this.  I don't think anyone involved intends to monetize the debt, but that is what it looks like to outsiders.

As reported by Reuters.

Exceptional fiscal expenditures, by their own terms, are intended to replace shortfalls in aggregate demand. And recent extraordinary monetary policy actions are intended to lower risk-free rates and grow balance sheet capacity to help offset the pullback by private financial intermediaries. But financial markets may extract penalty pricing if fiscal authorities are unable to demonstrate a credible return to sustainable budgets. And they are unlikely to look kindly on monetary authorities unless they decidedly and unambiguously chart their own independent paths. The Federal Reserve should not--and will not--compromise another kind of stability--price stability--to help achieve other government policy objectives.

The main danger of a Treasury purchase program is that people may wrongfully conclude that there is a risk that you are going to monetize the debt and reinflate.

I think the trick here is to assist the functioning of the private markets without signaling in any way, shape or form that the Federal Reserve will be party to monetizing fiscal largess, deficits or the stimulus program.
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Throughout history...what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can't let that happen. That's when you open the floodgates. So I hope and I pray that our political leaders will just have to take this bull by the horns at some point. You can't run away from it.

As reported by Wall Street Journal.

We need to draw a bright line once again between monetary policy and fiscal policy. The recent crisis has muddied that separation considerably and we must restore it. The Fed must not be seen by the public or the Congress as a piggy bank that can substitute for difficult fiscal policy decisions.

When a nation's treasury or finance ministry and its central bank work too closely together, there is a clear risk that the government's spending will end up being financed by the central bank's power to create money and that the public will become confused as to their respective roles...Independence is essential to central bank success and the Federal Reserve's current governance and decentralized structure has been an important contributor to ensuring that independence.

[L]ooming before us is the prospect of a heavy calendar of debt issuance by the Treasury. Between now and the end of the current fiscal year in October, the Treasury will issue just over $1 trillion in net new debt, with at least that much to follow in fiscal 2010. As the Book of Volcker warns, the Federal Open Market Committee can ill afford to be perceived as monetizing that debt, lest we come to be viewed as an agent of, rather than an independent guardian against, future inflation.

The Federal Reserve must, of course, be very careful to avoid any perception that it stands ready to monetize exploding fiscal deficits, as this would undermine confidence in our independence and raise serious doubts about our commitment to long-term price stability. These concerns certainly do not preclude some Treasuries purchases, however, as we seek to strengthen the economy in this time of crisis. With short-term Treasury rates near zero, an argument can be made that buying longer-term Treasuries would be especially effective in this regard.

Parenthetically, I would note that such purchases are not at all unusual. We routinely buy Treasury issues with a wide range of maturities in order to maintain a well-balanced portfolio. So, we are talking only about a possible change in emphasis here, not a sharp departure from past practice. That said, in my opinion, we certainly shouldn't try to peg long-term rates. Past efforts to do so soon have led to costly credit-market distortions and inevitably ended in tears. In my view, we must be very careful not to provide for an unsustainable and potentially disruptive distortion in the benchmark market for Treasuries through any extraordinary efforts above and beyond our normal balancing operations.

Similarly, we must be very cautious about the dimensions of our program to intervene directly in the market for asset-backed securities, making sure that our actions are the absolute minimum needed, and no more. Most important of all, we must continue to make clear that we will unwind our interventions in the market and shrink our balance sheet back to normal proportions once our task is accomplished, for this is, indeed, our unanimous and unflinching intention.