Bernanke Kept Monetary Stimulus Options Open This Afternoon

Fed Chair Ben Bernanke kept monetary stimulus options open this afternoon in his semiannual monetary policy testimony and report before the Senate Banking Committee. Ranking Republican Richard Shelby (R-AL) put the question this way:

SHELBY: Thank you.

Mr. Chairman, the minutes of the June FOMC, the Federal Open Markets Committee, meeting stated, and I’ll quote, “The committee would need to consider whether further policy stimulus might become appropriate if the Outlook were to worsen appreciably,” end quote.

Aside from taking the federal funds rate and the interest rate paid on reserves to zero, it’s not clear to me what further policy stimulus would mean. If further stimulus were to involve more asset purchases that you alluded to by the Fed, would the Fed buy treasuries or would they try to channel credit to specific segments of the financial market, such as housing or perhaps even municipal debt?

BERNANKE: Senator, I think it’s important to preface the answer by saying that monetary policy is currently very stimulative, as you, I’m sure, you’re aware.

We have brought interest rates down close to zero. We have had a number of programs to stabilize financial markets. We have language which says that we plan to keep rates low for an extended period. And we have purchased more than $1 trillion in securities. So certainly, no one can accuse the Fed of not having been aggressive in trying to support the recovery.

You know, that being said, if the — if the recovery seems to be faltering, then we would at least need to review our options, and we have not fully done that review, and we need to think about possibilities.

But broadly speaking, there are a number of things that we could consider and look at. One would be further changes or modifications of our language or our framework describing how we intend to change interest rates over time, giving more information about that. That’s certainly one approach.

We could lower the interest rate we pay on reserves, which is currently one-fourth of 1 percent.

The third class of things, though, has to do with changes in our balance sheet, and that would involve either not letting securities runoff as they are currently running off, or even making additional purchases.

We have not come to the point where we can tell you precisely what — what the leading options are. Clearly, each of these options has got drawbacks, potential costs. So we are going to continue to monitor the economy closely and continue to evaluate the alternatives that we have, recognizing that, as I said, the policy is already quite stimulative.

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About Pete Davis 99 Articles

Affiliation: Davis Capital Investment Ideas

Pete Davis advises Wall Street money managers on Washington policy developments that affect the financial markets. President of his own consulting firm since 1992, Davis Capital Investment Ideas, he draws on 11 years of experience as a Capitol Hill economist with the Joint Committee on Taxation (1974-1981), the Senate Budget Committee (1981-1983), and Senator Robert C. Byrd (1992). He worked in the House and Senate, and for Republicans and Democrats.

Davis brought the first computer policy model, the Treasury Individual Income Tax Model, to Capitol Hill in early 1974, when he became a revenue estimator on the Joint Committee on Taxation. He formulated the 1975 rebate, the earned income tax credit, the 1976 estate tax rates, the 1978 marginal tax rates, and the Roth-Kemp tax cut. He left Capitol Hill in 1983 for the Washington Research Office of Prudential-Bache Securities, where he advised investors for seven years.

Davis has long written a newsletter on the Washington-Wall Street connection for his clients; Capital Gains and Games is his first foray into the blogosphere.

Visit: Capital Gains and Games

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