Bernanke Says Fed Must Retain Flexibility on Credit
Federal Reserve Chairman Ben S. Bernanke said the central bank must retain the flexibility to withdraw its record injection of credit into the economy to keep inflation in check when the crisis abates.
The central bank’s emergency “activities must not constrain the exercise of monetary policy as needed to meet our congressional mandate to foster maximum sustainable employment and stable prices,” Bernanke said in the text of a speech in Charlotte, North Carolina.
The U.S. central bank has effectively printed money to buy or lend against a range of assets to alleviate the credit crunch and revive the economy. Bernanke’s speech today detailed steps that the Fed can take to remove that liquidity.
Bernanke also rebuffed criticism from some analysts that the Fed is favoring some credit markets over others in the emergency programs it has set up in the past six months. The Fed chief hailed a decline in home-loan rates in the wake of the central bank’s purchases of mortgage securities, and said the drop may help improve the housing market.
“Relieving disruptions in credit markets and restoring the flow of credit to households and businesses are essential if we are to see, as I expect, the gradual resumption of sustainable economic growth,” the Fed chief said today.
Balance Sheet
The central bank has expanded its balance sheet by $1.2 trillion over the past year, taking on assets including mortgage securities, corporate debt and now long-term Treasuries under the Fed’s latest policy decision last month.
The Fed’s Open Market Committee decided to buy as much as $300 billion of long-term Treasuries after a split between some officials over how best to ease the credit crunch. Richmond Fed President Jeffrey Lacker dissented in a January FOMC vote, favoring purchases of Treasuries rather than the use of credit programs. Philadelphia Fed President Charles Plosser has also expressed concern about affecting particular credit markets.
Bernanke said that the Fed’s lending for purchases of commercial paper and securities backed by consumer and business loans don’t mean it’s engaging in “credit allocation.” He said “our programs have been aimed at improving financial and credit conditions broadly.”
‘Uncomfortable’ Steps
The Fed chairman also hailed last month’s joint statement with the Treasury that spelled out the principles underlying the central bank’s work with the Treasury to revive credit. While the Fed has implemented “unconventional” measures and taken some “extremely uncomfortable” steps, it’s critical that its efforts “do not interfere with the independent conduct of monetary policy,” Bernanke said.
The Fed’s tools for raising short-term interest rates once the crisis wanes include unwinding the emergency-loan programs, conducting reverse repurchase agreements against long-term securities holdings and increasing the rate the Fed pays on bank reserves, Bernanke said. The emergency programs were designed to be “unwound as markets and the economy revive.”
Home-loan rates have declined since the Fed announced the purchases of mortgage debt, and “over time, lower mortgage rates should help to improve conditions in the housing market, whose persistent weakness has had a major impact on economic and financial conditions more broadly,” Bernanke said in remarks prepared for a conference hosted by the Richmond Fed bank car insurance quotes.
New Tools
Bernanke reiterated that the Fed and Treasury are seeking unspecified legislation to give the Fed “additional tools for managing bank reserves.” San Francisco Fed President Janet Yellen said last month that the central bank wants authority to issue its own debt.
“The large volume of reserve balances outstanding must be monitored carefully, as — if not carefully managed — they could complicate the Fed’s task of raising short-term interest rates when the economy begins to recover or if inflation expectations were to begin to move higher,” Bernanke said.
The Fed normally raises interest rates by selling Treasuries on its balance sheet, draining reserves from the banking system. That task is tougher with the Fed’s commitment last month to buy more than $1 trillion in mortgage-backed securities, which are harder to sell quickly without roiling markets.
Bernanke said the Fed expects to be “fully repaid” on loans made in connection with the bailouts of Bear Stearns Cos. and American International Group Inc. “From a credit perspective, these support facilities carry more risk than traditional central bank liquidity support, but we nevertheless expect to be fully repaid,” Bernanke said.
Share of Assets
Credit extended under those rescues accounts for about 5 percent of the Fed’s balance sheet, he reiterated.
Earlier today, Fed Vice Chairman Donald Kohn said the central bank, Congress and the Obama administration must remain “flexible and open” to additional policies to stimulate growth and cushion the financial system. A report today showed the U.S. unemployment rate jumped in March to the highest level since 1983 as the economy lost 663,000 jobs.
The Fed is also trying to restart the market for securities backed by loans through a program that may rise to $1 trillion. The Term Asset-Backed Securities Loan Facility, or TALF, though, is encountering resistance from investors, undermining Bernanke’s attempt to further drive down borrowing costs.
Deals arranged for the TALF may fail to rise much next week from the $8.3 billion first round in March, said Reed Auerbach, co-chief executive officer of law firm McKee Nelson LLP in New York. Hedge funds and other investors are balking because of visa limits on workers and possible efforts to tax earnings.
Bernanke said today that the TALF is “expected to grow in the months ahead.”
The ballooning Fed balance sheet has also attracted calls from Congress for more transparency in the identity of borrowers. Yesterday, the Senate voted 59-39 for an amendment to a pending budget plan that calls on the Fed to release details on which banks have received last-resort loans, how much they have taken and what they are doing with the money.
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