ATLANTA — Federal Reserve Board chairman Ben Bernanke, like his vice chairman Don Kohn, gave no indication Sunday that the Fed will be tightening credit anytime soon in a speech to a large group of economists.
Bernanke, in remarks to the American Economic Association’s annual convention, said that “at some point” the Fed will have to “normalize its balance sheet,” which has been swollen to more than twice its normal size through heavy Fed lending and asset purchases during the financial crisis and recession.
Bernanke also said the Fed has a “very robust strategy” for exiting its easy-money policy, which has kept the federal funds rate near zero for more than a year. But he emphasized it will only raise rates “when the time comes.”
For the time being, he said, the economy is “only now beginning to recover.”
Meanwhile, he dismissed concerns about the value of the dollar.
Earlier, talking to the same group, Kohn said recovery is apt to be “gradual,” unemployment will likely be “slow” to fall, and inflation will stay “quite subdued.” He repeated the Fed’s expectation that rates will stay “exceptionally low for and extended period.”
Bernanke’s prepared text was mostly devoted to once again defending the Fed against allegations that it helped cause the housing boom and bust by keeping monetary policy excessively easy earlier in the decade. He did not deal with current economic and policy issues other than to suggest that the recovery is still in its infancy.
After his speech, Bernanke was asked about rapid growth in the monetary base — reserves plus currency in circulation. He also was asked whether net buying of gold by China and India reflects a loss of confidence in the U.S. dollar and the U.S. financial system.
Explaining the more rapid growth of the monetary base recently, Bernanke said it results from the interaction of continued long-term securities purchases and less short-term borrowing.
“The monetary base is a consequence of Federal Reserve policies, of course,” he said. “We have been purchasing securities, including Treasuries and mortgage-backed securities, and those practices will create more monetary base as they increase excess reserves in the banking system.
“The net effect of those purchases on the monetary base was muted for quite a while, because, even as we were making those purchases and creating more excess reserves, the other parts of our programs — our lending programs to the banks, our (swaps) with foreign central banks, a whole variety of short-term liquidity provision programs which were at one point dominating our balance sheet — have been unwinding as the financial crisis has been steadying.”
“So the need for that liquidity has disappeared, or if not disappeared has much moderated,” Bernanke said. “And so the decline in that borrowing has been offsetting the increase in asset purchases. We are obviously aware that at some point we’re going to have to normalize balance sheet.”
“We’re going to have to make sure that we have an exit strategy that will make sure that the increase in the monetary base does not feed through to untoward increases in broader money aggregates and credit aggregates,” he said.
“We have a very robust strategy for doing that. It includes both raising the interest rate that we pay on reserves plus a number of measures that we’ve been testing that will allow us to drain reserves from the system,” Bernanke said. “So we are quite confident that we can restrain broader money growth and credit growth as needed to exit from these unusual policies when the time comes — when the time comes.”
— Market News International
