WASHINGTON (MNI) – The following is the second and final section of
the text of Federal Reserve Chairman Ben Bernanke’s statement Thursday
to the House Financial Services Committee, updating previous testimony
submitted for a hearing canceled by weather:

As an additional means of draining reserves, the Federal Reserve is
also developing plans to offer to depository institutions term deposits,
which are roughly analogous to certificates of deposit that the
institutions offer to their customers. A proposal describing a term
deposit facility was recently published in the Federal Register, and the
Federal Reserve is finalizing a revised proposal in light of the public
comments that have been received. After a revised proposal is reviewed
by the Board, we expect to be able to conduct test transactions this
spring and to have the facility available if necessary thereafter. The
use of reverse repos and the deposit facility would together allow the
Federal Reserve to drain hundreds of billions of dollars of reserves
from the banking system quite quickly, should it choose to do so. When
these tools are used to drain reserves from the banking system, they do
so by replacing bank reserves with other liabilities; the asset side and
the overall size of the Federal Reserves balance sheet remain

(Primary dealers are broker-dealers that trade in U.S. government
securities with the Federal Reserve Bank of New York.)

If necessary, as a means of applying monetary restraint, the
Federal Reserve also has the option of redeeming or selling securities.
The redemption or sale of securities would have the effect of reducing
the size of the Federal Reserves balance sheet as well as further
reducing the quantity of reserves in the banking system. Restoring the
size and composition of the balance sheet to a more normal configuration
is a longer-term objective of our policies. In any case, the sequencing
of steps and the combination of tools that the Federal Reserve uses as
it exits from its currently very accommodative policy stance will depend
on economic and financial developments and on our best judgments about
how to meet the Federal Reserves dual mandate of maximum employment and
price stability.

In sum, in response to severe threats to our economy, the Federal
Reserve created a series of special lending facilities to stabilize the
financial system and encourage the resumption of private credit flows to
American families and businesses. As market conditions and the economic
outlook have improved, these programs have been terminated or are being
phased out. The Federal Reserve also promoted economic recovery through
sharp reductions in its target for the federal funds rate and through
large-scale purchases of securities. The economy continues to require
the support of accommodative monetary policies. However, we have been
working to ensure that we have the tools to reverse, at the appropriate
time, the currently very high degree of monetary stimulus. We have full
confidence that, when the time comes, we will be ready to do so.

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** Market News International Washington Bureau: 202-371-2121 **

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