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Title: Bernanke Says Economy Needs ‘Accommodative’ Policies
Source:
BBG
URL Source: http://www.bloombrg.com
Published: Mar 25, 2010
Author: Scott Lanman
Post Date: 2010-03-25 11:08:36 by war
Keywords: None
Views: 969
Comments: 4
March 25 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the U.S. economy still needs low interest rates and that the central bank will be ready to tighten credit “at the appropriate time.” “The economy continues to require the support of accommodative monetary policies,” Bernanke said today in prepared testimony to the House Financial Services Committee, repeating parts of a statement to the panel from last month. “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.” The central bank chief and his colleagues have been outlining their strategy for tightening credit in time to prevent the recovery from stoking inflation. Officials are concerned that the federal funds rate, their main policy tool for 20 years, isn’t as effective as before in influencing borrowing costs. “As the expansion matures, the Federal Reserve will need to begin to tighten monetary conditions to prevent the development of inflationary pressures,” Bernanke said in the text of remarks. “We have full confidence that, when the time comes, we will be ready to do so.” Treasury two-year notes rose after Bernanke’s comments, pushing the yield down two basis points, or 0.02 percentage point, to 1.07 percent at 10:38 a.m. in New York. The Standard & Poor’s 500 Index rose 0.6 percent to 1,174.58. Today’s hearing, originally scheduled for Feb. 10, was postponed because of a snowstorm. The Fed went ahead and released Bernanke’s prepared testimony that day, in part to lay the groundwork for a planned increase in the interest rate the central bank charges for direct loans to banks. Discount Rate The Fed raised the so-called discount rate on Feb. 18 to 0.75 percent from 0.50 percent and said the change represented a “normalization” of lending rather than a change in policy. When Bernanke convened the Federal Open Market Committee for its March 16 meeting, policy makers left the benchmark federal funds rate in a range of zero to 0.25 percent and repeated a pledge to keep rates low for an “extended period.” Bernanke included that part of the FOMC statement in today’s testimony. The Fed chief said closing emergency-loan programs and raising the discount rate “do not constitute a tightening of monetary policy, nor should they be interpreted as signaling any change in the outlook for monetary policy.” Raising the interest rate paid on funds deposited by banks at the Fed, as well as so-called reverse repurchase agreements that temporarily drain cash from the banking system, will be among the main tools for tightening credit, Bernanke said. Housing Debt Redeeming or selling securities on the balance sheet is an option, “if necessary,” Bernanke said today. In February, he said he doesn’t expect the Fed “in the near term” to sell the $1.43 trillion of housing debt being purchased through the end of this month, “at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery.” The New York Fed said March 8 that it would use money- market mutual funds to eventually help drain as much as $1 trillion from the financial system so the central bank can tighten credit and raise interest rates. The Fed said in a statement on the reverse-repurchase agreement program that “no inference should be drawn about the timing of any prospective monetary policy operation.” That move may be months away. U.S. central bankers will begin raising rates at the Nov. 3 FOMC meeting and increase the benchmark lending rate to 0.75 percent by the end of the year, according to the median estimate of economists surveyed by Bloomberg News from March 1 to March 10. Reluctant to Hire While the economy is improving, employers are still reluctant to hire, homebuilding is “depressed” and inflation will be “subdued for some time,” the FOMC said March 16. The jobless rate was unchanged in February at 9.7 percent, down from the 26-year high of 10.1 percent in October. Some officials want to move away from the low-rate commitment. Kansas City Fed President Thomas Hoenig dissented in March for the second straight meeting and stepped up his objection to the “extended period” language, saying it could “increase risks to longer-run macroeconomic and financial stability,” according to the Fed. Last night, Fed Vice Chairman Donald Kohn said he expects the central bank, while unsure how $1 trillion in excess bank reserves will influence prices, will tighten credit early enough to avert an inflationary surge. “I am confident the Federal Reserve can and will tighten policy well in advance of any threat to price stability, and successful execution of this exit will demonstrate that these emergency steps need not lead to higher inflation,” Kohn said at Davidson College in Davidson, North Carolina.
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