There was little news in today’s prepared testimony by Ben Bernanke, Federal Reserve chairman, on the exit strategy. Mr Bernanke chose not to talk about the discount rate except to say that lasts month’s increase should not be viewed as a monetary policy shift.
And he mostly went over what he had already said last month in terms of the sequencing of the tightening, with reverse repurchase agreements and term deposits ramping up before – or alongside – an increase in the interest rate on reserves. Scant if any change there.
But one shift in tone did stand out. Mr Bernanke confirmed that Fed purchases of mortgage-asset backed securities, which it built up duing the crisis, would end as expected next week, despite concerns that this could lead to higher mortgage rates. What comes next is the subject of a heated debate within the central bank. Some argue that housing is too weak and the existing mortgage assets should simply be allowed to run to maturity, which could take years. Others argue that the Fed’s bloated balance sheet should be returned to its normal size (which Mr Bernanke specified was under $1,000bn on Thursday) as quickly as possible – and those mortgage assets should be sold sooner rather than later.
Mr Bernanke has been seeking a middle ground. Last month, he said any mortgage asset sales should come after the first phase of monetary tightening was over. But today, he simply said the Fed had the option of “redeeming or selling securities” as a means of applying monetary restraint. The timing and sequencing, he argued, would depend on “economic and financial developments and on our best judgments about how to meet the Federal Reserve’s dual mandate of maximum employment and price stability.”
