The first potential concern is that the exit strategy could simply cause confusion among market participants, prompting volatility in asset prices...  The recent changes to the discount rate and the Treasury's Supplementary Financing Program balances highlight this concern, as the amount of attention that those actions received was outsized relative to their significance for the economy or for the path of short-term interest rates.

WSJ:  On another issue, I would be a little bit uncomfortable restarting the Supplemental Financing Program [with the U.S. Treasury]. Treasury debt is going to hit the limit again next year, so the Treasury might be in a position where it might need to draw it down right as you are withdrawing reserves from the financial system.

Plosser:  I’d just as soon get rid of that tool. I don’t think we ought to be relying on the Treasury in that way. It gives them too much discretion over our monetary policy and our balance sheet. I’d just as soon not have it. But it hasn’t been high on anybody’s agenda.

SEN. BUNNING:  On Tuesday, the Treasury announced that they were starting up a supplemental financing program again. Under -- that's $200 billion- plus -- under that program, Treasury issues debts and deposits the cash with the Fed. That is an effective -- same thing as the Fed issuing its own debt, which you know is not legal.

MR. BERNANKE: What it does --

SEN. BUNNING: There are -- let me get finished with the question and you can answer.

What are the legal grounds that the Fed and Treasury used to justify that program, and did anyone in the Fed or Treasury object when the program was created?

MR. BERNANKE: Well legally, we are the fiscal agent of the Treasury and we hold Treasury balances that they -- for all kinds of purposes.

So it's -- there's no --

SEN. BUNNING: But they're not allowed to issue debt -- Treasury.

MR. BERNANKE: Treasury's allowed to issue debt.

SEN. BUNNING: On its own?

MR. BERNANKE: I don't -- they issue bills and other kinds of debt all the time.

SEN. BUNNING: Oh -- I mean -- yes.

Treasury Notes, Treasury Bills, Treasury Two-years, Five-years, Ten-years -- but you're buying their debt.

MR. BERNANKE: We're just paying them interest on their deposits on our balance sheet.

SEN. BUNNING: Okay. That isn't the answer that I wanted.

From the Q&A session

If we’re going to go the supplemental financing programme route, we need SFPs to be exempt from the debt ceiling. The other approach is the Fed bill approach. It’s not subject to the debt limit. [Fed bills] can be sold broadly in the market, for example to money-market mutual funds. The problem is then there are two issuers of US government obligations. You don’t want both a three-month Fed bill and a three-month T-bill. It creates confusion. I don’t think it’s a big problem; lots of central banks have authority to issue central bank bills. We don’t want to be in the Treasury’s way so we’d probably restrict maturity to less than 30 days so they have 30 days and up.

I think Treasury is quite sympathetic to letting us do one or the other. We’d like Congress to consider it. It’s nice to have—as opposed to critical. That said, if I could get a belt and suspenders, I’ll take belt and suspenders. As long as people are worried about whether we have adequate tools, it makes sense for us to get more tools even if we don’t think we need them.

Mixing monetary and fiscal policy is fraught with risks. Many historical instances of monetary instability have been the result of central banks being prevailed upon to use their balance sheets for fiscal ends in ways that impeded their ability to keep inflation under control. That is why in recent decades, countries around the world have provided a measure of independence to their central banks, within frameworks that ensure accountability, in order to explicitly insulate them from short-run political exigencies that might diminish the credibility of their commitment to control inflation. The cornerstone of that framework in the United States dates back to 1951, when the Treasury-Fed Accord formally gave the Federal Reserve independent control of its balance sheet.⁸

...While at the present time, credit programs do not conflict with our monetary policy strategy, there could well come a time at which monetary stimulus needs to be withdrawn to prevent a resurgence of inflation, even though credit markets are not deemed fully healed. At that time, containing inflation may require closing down credit programs, or finding an alternative, non-monetary financing arrangement for them. Price stability, after all, is the vital first ingredient in financial market stability.