It should surprise no one that Fed Chief Ben Bernanke today said while the economy is showing “tentative signs of stabilization,” the central bank plans to maintain its stimulative monetary policy for an “extended period.”
But Bloomberg has a few paragraphs on an eventual exit strategy for the Fed based on Bernanke’s semi-annual testimony before the House Financial Services Committee and related reports:
“We have a number of tools that will enable us to raise market interest rates as needed,” he said, noting that outright sales from the Fed’s portfolio would also raise longer-term interest rates. He previewed the discussion in an opinion piece published late yesterday in the Wall Street Journal.
Among the five options, the interest rate on banks’ deposits with the Fed is “perhaps the most important” tool, Bernanke said. It “will most likely be used in combination” with other methods, including reverse-repurchase agreements and term deposits, the report said.
Other options include for the Treasury to sell bills and deposit the funds with the Fed, and to sell some of the long- term securities on the Fed’s balance sheet, Fed officials said in the accompanying Monetary Policy Report.
Winding Down Stimulus
Fed officials are trying to assure markets they can wind down the monetary stimulus rapidly if needed to avoid inflation. They must also avoid stalling an expansion with a premature rate increase.
“The main risks remain on the downside,” J. Alfred Broaddus Jr., the former president of the Richmond Fed, said before the announcement. “With the kind of weakness we are seeing in the economy, you’ve got to be very careful about taking monetary stimulus away.”
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