Fed Chairman Ben Bernanke said Friday in a speech in Charlotte, NC, that the central bank’s stepped-up purchase programs for Treasury and mortgage-related securities have been successful in lowering key borrowing costs and increasing the availability of credit. “So far, the programs are having the intended effect,” Bernanke said.
The Fed Chief also rejected some recent criticism that the Federal Reserve is favoring some credit markets over others in the emergency programs it has set up in the past two quarters.
“Relieving disruptions in credit markets and restoring the flow of credit to households and businesses are essential if we are to see, as I expect, the gradual resumption of sustainable economic growth,” Bernanke said .
Mr. Bernanke also mentioned the central bank’s focus on the size of reserve balances held at the Fed by commercial banks, saying that if those balances aren’t carefully managed, and managed right, they could complicate things and make it tougher for the Fed to eventually tighten policy. We have a number of tools we can use to reduce bank reserves or increase short-term interest rates when that becomes necessary, Bernanke said:
First, many of our lending programs extend credit primarily on a short-term basis and thus could be wound down relatively quickly. In addition, since the lending rates in these programs are typically set above the rates that prevail in normal market conditions, borrower demand for these facilities should wane as conditions improve.
Second, the Federal Reserve can conduct reverse repurchase agreements against its long-term securities holdings to drain bank reserves or, if necessary, it could choose to sell some of its securities. Of course, for any given level of the federal funds rate, an unwinding of lending facilities or a sale of securities would constitute a de facto tightening of policy, and so would have to be carefully considered in that light by the FOMC.
Third, some reserves can be soaked up by the Treasury’s Supplementary Financing Program.
Fourth, in October of last year, the Federal Reserve received long-sought authority to pay interest on the reserve balances of depository institutions. Raising the interest rate paid on reserves will encourage depository institutions to hold reserves with the Fed, rather than lending them into the federal funds market at a rate below the rate paid on reserves. Thus, the interest rate paid on reserves will tend to set a floor on the federal funds rate. [via Fed]