Lisa Simpson
Feb 18,2010
In: Finance

Bernanke Talks About how to Increase the Rate Without Mentioning when it Would be Done

Bernanke talks about how to increase the rate without mentioning when it would be done.

Last Wednesdy 10th February 2009 the chairman of the Federal Reserve Ben Bernanke talked about the framework of a plan to increase the rate of interest but he remained vague about when it would be done. He referred to it being enforced at “at some point of time” and “when the time comes.” Discussions are on about turning back the emergency plans that had been launched form 2007 to prop up the markets and the economy.

The Federal Reserve had given an incentive to lending by lowering the interest rates by which it granted loans to the banks. The idea was that the banks would take the money to once more returen to the lending business with vigour. But this has not happened.

The Federal Reserve has scooped up mortgage backed securities. Treasury bonds and notes and created a balance sheet running into $2.2 trillion.

Fearing inflation both these steps would have to be curtailed. But in a statement running into 10 pages Bernanke gave little indications as to when this would start. He wrote, “Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding. We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively.”

Bernanke however provided fresh details of significant concern. He tsaid he balance sheet would be shrunk with the progress of the recovery.

Bernanke suggested the deployment of a new policy venture levying interest rates on excess reserves. It would be of great signifance to the broad strategy being employed by the Federal Reserve.

He said the by increasing rate of interest would push up other short term rates of intrest inclusive of benchmark Fed funds rate – the latter being the rate at which banks lend each other in day to day transactions.

Bernanke added that there was the possibility that the Federal Reserve “could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities.”

Representative Spencer Bachus (Alabama) – one of the senior Republicans in the House Financial Services Committee pointed out that there were many in the congress that had never approved of the extraordinary steps that had been taken by the Federal Reserve right from the start.