Federal Reserve Board chairman Ben Bernanke broke little new ground yesterday as he reiterated that the Fed is likely to keep the federal funds “exceptionally low ... for an extended period.”
Bernanke, presenting the Fed’s semi-annual Monetary Policy Report to Congress, said the central bank will need to tighten monetary policy “at some point” to contain inflation, and said the Fed has the tools it needs to do that.
But he gave no indication he sees any need to do so in the foreseeable future, citing “quite weak” labor market conditions, a still uncertain and modest outlook for economic growth, and the likelihood of “subdued” inflation.
The Fed chief, in his prepared testimony to the House Financial Services Committee, reiterated that last week’s discount rate hike does not signal a tightening of monetary policy.
Though the Fed is due to complete purchases of agency and agency-guaranteed mortgage-backed securities at the end of March, Bernanke left the door open to additional purchases, saying the Fed will “continue to evaluate” the asset purchase program.
He indicated the Fed will rely heavily on its ability to pay interest on reserves, saying that will put “significant upward pressure” on all short-term interest rates and in turn on long-term rates.
Bernanke said the Fed expects to be able to use reverse repurchase agreements to “absorb large quantities of reserves” and said it is developing a capacity to do reverse repos with money market mutual funds and government-sponsored enterprises, which are ineligible to earn interest on reserves.
He also said a new term deposit facility, which would allow banks to convert reserves into interest earning deposits at terms longer than overnight, “could
commence during the second quarter.”
Noting that the Fed has kept the federal funds rate in a range of zero to 25 basis points since December 2008, Bernanke said the Federal Open Market Committee “continues to anticipate that economic conditions — including low rates of resource utilization, subdued inflation trends, and stable inflation expectations — are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
