In testimony today’ Fed Chairman Bernanke said that the Fed will begin monetary tightening when the economy improves, but that the sequencing of the actions has not yet been decided. However, the Fed will move before there is a full scale recovery. “We will not be able to wait until things are back to normal” before starting to raise rates, but that the Fed will “make sure the economy is on a sustainable growth path” before they will act.
Bernanke said that the Fed takes both sides of its dual mandate very seriously – to promote both stable inflation and maximum employment. Currently the “employment situation is very weak” and because of that current ultra-low interest rates “will be justified for an extended period.” That pledge is not for a “fixed period of time”, but is instead conditional on the expected path of growth. “If those things begin to move, that’s going to lead us to respond.” Bernanke said “we don’t see at this point any major mispricings in asset classes” which could suggest that the ultra-low rates are fueling a future financial bubble or imbalances in the financial system.
He also said that the housing market is “still quite weak” but that the mortgage sector is “performing better.” With the Fed almost complete with their effort to buy $1.25 trillion in mortgages ” has been effective” and he’s not worried the end of the program will bring trouble.” So far, there seems to be very little negative reaction” to the end of the program. That is an indication that the Fed will not be expanding the program and that the mortgage market will be fine without the Fed.
The efforts by the Fed have run up its balance sheet to $2 trillion and Bernanke said the Fed wants to reduce it back to pre-crisis levels, somewhere under $1 trillion. He said that “we are not monetizing the debt and we have no immediate plans to do so in the future.” Bernanke would like to get back to an all-Treasurys portfolio and anticipated “a gradual process” of asset sales at some point. Just letting mortgage debt bought by the Fed to simply mature won’t do the job fast enough.
Bernanke was “quite open” to the idea of an audit of the Fed’s emergency lending facilities, including revealing the names of borrowers, as long as it was done with an appropriate time lag. He believes that the emergency lending faciliteis have done what they were intentded to do which was to help revive the target market sectors.
