Ben Bernanke, Federal Reserve chairman, heads to Capitol Hill on Thursday for a hearing on the US central bank’s exit strategy.
With the latest FOMC statement out only a week ago, few economists are expecting any significant changes to the monetary policy outlook of “exceptionally low” rates for an “extended period”. But that does not mean there won’t be news coming out of Mr Bernanke’s mouth. One guess of several economists, such as Michael Feroli of JPMorgan, is that the headlines could be made by a discussion of the discount rate – the rate at which commercial banks can borrow from the Fed in a pinch.
References to the discount rate were notably absent from the FOMC statement last week – but that doesn’t mean the committee did not discuss it.
Last month, the Fed raised the discount rate from 0.5 per cent to 0.75 per cent, increasing the spread over its main interest rate, the Fed funds rate, to 50 basis points. Before the crisis, that spread stood at 100 basis points, and some are expecting the Fed will soon make a further move in that direction.
Mr Bernanke could presumably use tomorrow’s appearance to prepare the ground for further increases in the discount rate – if not to explain a new hike itself.
But the Fed has tried hard in recent months to argue that rises in the discount rate constitute a normalisation of a liquidity tool that was boosted during the financial crisis, and not the first step in monetary tightening, which is probably one of the reasons it was left out of the FOMC statement. So Mr Bernanke may even decide to exclude any meaningful discount rate talk from Thursday’s comment as well.
