Ben Bernanke, Federal Reserve chairman, didn’t testify before the House Financial Services committee today on the central bank’s exit strategy. The committee meeting, like virtually everything else in the US capitol, was thwarted by the snow.
He did, however, release his prepared testimony, which received (as always) brilliant coverage in the FT, earlier on this blog, and in an editorial and other comment.
But I spent my day in a shutdown city. And in the spirit of passing time in a city where very little got done today, I’m choosing to write about what Mr Bernanke didn’t say, rather than what he did.
1. Mr Bernanke did not say how much will it cost the Fed to pay interest on banks’ holding of bank reserves.
The Fed chief said that raising the interest rate on reserves would be the most important means of tightening monetary policy when it needed to begin fighting inflation. And it’s a tool the central bank has only had since 2008, so there’s no way to guess by comparing historically.
So to get the answer to that question, it seems that we’ll all just have to wait. “The Fed has not as of yet provided any estimation of the cost of the policy, one would assume that that is forthcoming,” said Joseph Brusuelas, an economist who specialises in monetary policy.
2. Mr Bernanke did not say the Treasury would eventually help drain excess reserves through the Supplementary Financing Programme (SFP).
The omission of a discussion of the SFP from his speech, probably means the Fed has no immediate plans to use it. “The increase in the debt ceiling, as well as the press release from the Treasury Borrowing Advisory Committee, had raised the prospect of this occurring. The non-mention in a detailed speech on exit strategies suggests this tool will probably remain in the shed indefinitely,” said Michael Feroli analyst at JPMorgan Chase.
3. Mr Bernanke did not say who would take over its MBS-buying responsibilities now that it has stopped buying (and is leaving the door open, in the long term, of selling the assets already on its books.)
Fortunately, we already know the answer to that.
Unfortunately, as it turns out, it’s you and me, the taxpayers.
In December the Obama administration uncapped its credit lines to Fannie Mae and Freddie Mac, the two government sponsored entities, for the next three years and allowed them to buy more mortgage backed securities. So as the GSEs buy more MBS, Treasury’s (and by extention the taxpayer) on the hook for any debt that goes bad.
But that does mean that the Fed is moving away from its “unusual and exigent” actions towards its more standard responsibilities.
The Obama administration’s December moves to support the GSEs are a “tacit acknowledgement that the Fed will have to plain vanilla monetary policy,” said Mr Brusuelas. “This is the first in a long series of steps toward policy normalisation.”
