The economy continues to deteriorate, although there are some bright spots and further cuts in interest rate targets are “feasible,” their ability to support the economy is limited, Federal Reserve Board chairman Ben S. Bernanke said yesterday.
Bernanke suggested several methods the central bank could use.
“The Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities,” he said. “This approach might influence the yields on these securities, thus helping to spur aggregate demand. Indeed, last week the Fed announced plans to purchase up to $100 billion in [government-sponsored enterprise] debt and up to $500 billion in GSE mortgage-backed securities over the next few quarters. It is encouraging that the announcement of that action was met by a fall in mortgage interest rates.”
The Fed also can provide backstop liquidity directly to certain financial markets, “as we have recently done for the commercial paper market,” Bernanke said. Also, he suggested, working with Treasury, the Federal Deposit Insurance Corp., and other agencies, to “take all steps necessary to minimize systemic risk.”
“Regarding interest rate policy, although further reductions from the current federal funds rate target of 1% are certainly feasible, at this point the scope for using conventional interest rate policies to support the economy is obviously limited,” Bernanke told the Greater Austin Chamber of Commerce, according to a prepared text of his remarks released by the Fed.