Bernanke says low rates still necessary

Bernanke says low rates still necessary
By James Politi in Washington
Copyright The Financial Times Limited 2010
Published: March 25 2010 15:44 | Last updated: March 25 2010 15:44
http://www.ft.com/cms/s/0/792fa910-3820-11df-9e8e-00144feabdc0.html


Ben Bernanke, Federal Reserve chairman, on Thursday said that low interest rates remained necessary to tackle a “very weak” US labour market, even as the central bank moves forward with plans to tighten monetary policy once the recovery strengthens.

Last week, the Federal Open Market Committee agreed to keep the main interest rate steady at its current range of 0-0.25 per cent and stated that economic conditions were such that officials expected this monetary policy to remain in place for an “extended period”.

As the financial crisis unfolded in 2008, the Fed expanded the size of its balance sheet from about $800bn to more than $2,000bn, as the US central bank sought to support the banking system amid the turmoil.

But with stability returning to America’s banks and the economy on a path to recovery, Mr Bernanke has started mapping out his vision for bringing the Fed’s balance sheet back to its normal size and eventually tightening monetary policy. Mr Bernanke said the Fed intended to return the size of its balance sheet to below $1,000bn over time.

“The economy continues to require the support of accommodative monetary policies,” Mr Bernanke said before 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.”

Among the first steps already taken by the Fed was to unwind some of the emergency liquidity facilities set up during the crisis.

This includes the first increase last month in the discount rate, which is used by commercial banks when they want to borrow money in a pinch from the Fed. The discount rate stood at 1 percentage point above the Fed’s main interest rate before the crisis, and that spread narrowed to 0.25 of a percentage point during the crisis. Last month, Fed officials raised the spread to 0.5 of a percentage point – and some economists are expecting it to be increased further in the coming weeks and months.

“We have emphasised that both the closure of our emergency lending facilities and the adjustments to the terms of discount window loans are responses to the improving conditions in financial markets, “Mr Bernanke said. “They are not expected to lead to tighter financial conditions for households and businesses and hence do not constitute a tightening of monetary policy, nor should they be interpreted as signalling any change in the outlook for monetary policy.”

In addition, Mr Bernanke last month said that once the recovery was mature enough, the Fed would begin to ramp up operations such as “reverse repurchase agreements” that would allow the central bank to remove liquidity from the financial system. In addition, the Fed would also set up a “term deposit facility” at the US central bank – a kind of certificate of deposit for banks – that would entice financial institutions to store money at the central banks instead of lending it out.

This would be followed by increases in the interest on money that banks store at the US central bank, which now stands at 0.25 per cent.