Once it stops snowing, Ben Bernanke will talk – with great conditionality – about possible exit strategies from the various measures the Fed has introduced since the crisis. Each of the measures will enjoy very different exits.
First, the Fed’s provision of temporary lending (paragraph 10). “The exit from these programs is substantially complete,” Bernanke will say, at no loss to the Fed, and no expected loss in future. Peaking at $1,000-$1,500bn at the end of 2008, total credit outstanding now stands at $110bn.
Second, buying securities. The Fed made large-scale purchases of Treasury and agency securities to increase the stimulus (par 3). But “I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term,” Mr Bernanke will say (par 20). Securities will be allowed to roll-off or mature, but selling them off – for further tightening – would only be possible once policy tightening is underway and the economy is safe.
Third, exceptionally low interest rates (par 19). The exit strategy is to get markets ready by soaking up excess reserves (see below), which will provide tighter control over short-term rates. “The actual firming of policy would then be implemented through an increase in the interest rate paid on reserves,” Mr Bernanke will say. If a more rapid exit is required – eg. because of soaring inflation – the reserve absorption and rate rise could happen at the same time.
Fourth, facilities created to lend, stigma-free (par 8). There are two left: Taf (an auction facility for depository institutions) and Talf (which supports the market for asset-backed securities). The exit is already scheduled: Taf is due to conduct its last auction on March 8. Talf is scheduled to close on March 31 for non CMBS loans, and June 30 for those.
Fifth, bail-outs (par 11). The Fed bailed out Bear Stearns and AIG. Credit totals $116bn – or 5 per cent of the Fed balance sheet. “The Federal Reserve expects these exposures to decline gradually over time… ultimately incur[ring] no loss on these loans.” They note the loans were made in extreme circumstances and that a new statutory regime should preclude the Fed ever having to do this again.
Sixth, maximum maturity of discount window loans. This has been reduced from 90- to 28-days, but the Fed will “consider whether further reductions in the maximum loan maturity are warranted.”
There have also been byproducts of the Fed’s measures. One has been very high bank reserves. The plan to drain these reserves is threefold: (1) Reverse repos (par 16); (2) Fed offering deposit-taking banks ‘term deposits’, like certificates of deposit that banks offer customers (par 17); (3) The less likely option of redeeming or selling securities (par 18).
Importantly, the Fed is considering changing its policy communication from the fed funds rate, whose reliability as an indicator of short-term money markets is under question. “In particular, it is possible that the Federal Reserve could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities, as a guide to its policy stance” (pars 14 and 21).
