By Steven K. Beckner
WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke Wednesday
outlined three ways in which the Fed could provide additional monetary
stimulus, but said the Fed has no immediate plans for implementing them.
Bernanke, replying to questions from members of the Senate Banking
Committee after presenting the Fed’s semi-annual Monetary Policy Report
to Congress, said that if the economic recovery were to “falter,” there
are still potentially “effective” measures the Fed could take.
He listed:
— changing the Federal Open Market Committee’s policy guidance,
presumably to imply an even longer “extended period.”
— reducing the already low rate of interest the Fed pays banks on
excess reserves.
— buying more securities — or at least halting the current
practice of letting maturing securities in the Fed’s portfolio run off.
Bernanke opened the door to the possibility of eventual easing in
his prepared testimony. After saying that “the economic outlook remains
unusually uncertain,” he said, “We will continue to carefully assess
ongoing financial and economic developments, and we remain prepared to
take further policy actions as needed to foster a return to full
utilization of our nation’s productive potential in a context of price
stability.”
The Fed has held its federal funds rate target between zero and 25
basis points since December 2008. It is paying 25 basis points on excess
reserves. The Fed has also purchased $1.725 trillion in longer term
securities. It completed its asset purchases at the end of the first
quarter, and most of the speculation since then has been about when the
Fed will sell assets.
In his prepared testimony, Bernanke mused about adjusting the Fed’s
reinvestment policy — its policy for handling repayments of principal
on the securities — as part of a strategy for returning to a more
normal portfolio in terms of size, composition and maturity.
“Currently, repayments of principal from agency debt and MBS are
not being reinvested, allowing the holdings of those securities to run
off as the repayments are received,” he said. “By contrast, the proceeds
from maturing Treasury securities are being reinvested in new issues of
Treasury securities with similar maturities.”
“At some point, the Committee may want to shift its reinvestment of
the proceeds from maturing Treasury securities to shorter-term issues,
so as to gradually reduce the average maturity of our Treasury holdings
toward pre-crisis levels, while leaving the aggregate value of those
holdings unchanged,” he said.
But if necessary, the Fed could move in a different direction and
grow the size of its securities holdings by not letting maturing
securities run off or by new, outright securities purchases, said
Bernanke, adding that those are among the contingencies being considered
by the FOMC.
Asked what further monetary stimulus the Fed could provide,
Bernanke began by stressing that already “monetary policy is currently
very stimulative.”
“We have brought interest rates down close to zero, we have had a
number of programs to stabilize financial markets, we have language
which says we plan to keep rates low for an extended period,” he said.
“And we have purchased more than a trillion dollars in securities. “So
certainly no one can accuse the Fed of not having been aggressive in
trying to support the recovery.”
However, Bernanke went on, “That being said, if the recovery seems
to be faltering then we will at least need to review our options.”
“We have not fully done that review and we need to think about
possibilities,” he said. “But broadly speaking, there are a number of
things we could consider and look at.”
“One would be further changes or modifications of our language or
our framework describing how we intend to change interest rates over
time — giving more information about that, that’s certainly one
approach,” he said in an obvious reference to the FOMC’s oft-repeated
declaration that “the federal funds rate is apt to stay “exceptionally
low…for an extended period,” depending on “economic conditions,
including low rates of resource utilization, subdued inflation trends,
and stable inflation expectations.”
Secondly, Bernanke said, “We could lower the interest rate we pay
on reserves, which is currently one-fourth of 1%.”
“The third class of things has to do with changes in our balance
sheet and that would involve either not letting securities run off — as
they are currently running off — or even making additional purchases,”
he said.
“We have not come to the point where we can tell you precisely what
the leading options are,” Bernanke said. “Clearly each of these options
has got drawbacks, potential costs, so we are going to continue to
monitor the economy closely and continue to evaluate the alternatives
that we have, recognizing that — as I said — policy is already quite
stimulative.”
In response to similar questions, Bernanke insisted the Fed is not
“out of bullets,” as one senator suggested.
He said the Fed is “not prepared to take” any of the forementioned
steps “in the near-term.” But he said there is “the potential for some
of these (three steps) to be effective.” And he said the FOMC will
continue to “evaluate” those options.
Meanwhile, in other comments, Bernanke repeated his concerns about
the dearth of bank lending, particularly to small business. He said he
is “concerned that (banks) might be putting their thumb on the scale
on the wrong side and being overly cautious.” He said the Fed is
determined to make sure “creditworthy borrowers” get credit.
Bernanke acknowledged that many corporations have large cash
balances, but said they need to become more confident in the outlook
before they use that cash to hire and investl.
He called state and municipal fiscal strains a further “drag” on
the economy, but said “the municipal bond market is functioning
reasonably well.”
Regarding federal fiscal policy, Bernanke said it is important to
distinguish between cyclical and structural deficits and said it would
be good for Congress to reassure financial markets that longer term
structural deficits will come down.
When asked what the Fed would have to see before tightening,
Bernanke replied, “That’s certainly got to be a committee decision. But
I would say that certainly one important criteria would be whether the
recovery is sustainable, whether its fading and not being
self-propelling.” He continued, “If the recovery is continuing at a
moderate pace, then the incentive to take extraordinary actions would be
somewhat less.”
“But certainly,” he said, “we would want to make sure that the
economy continues to move back towards a more normal state of resource
utilization.”
** Market News International Washington Bureau: 202-371-2121 **
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