Bernanke outlines plan for pulling in stimulus aid

By Neil Irwin
Washington Post Staff Writer
Wednesday, February 10, 2010

The Federal Reserve has the tools it needs to remove its expansive interventions in the economy, Chairman Ben S. Bernanke said Wednesday in congressional testimony that gave a detailed account of how the Fed will go about draining cash and taking other steps to wind down its efforts to prop up growth.

Bernanke indicated that the economy remains sufficiently weak that no interest rate hike or other steps to reduce the money supply are imminent. But he is betting that by being more clear about how the Fed will one day undo its unprecedented steps to prop up growth, the Fed will maintain credibility as an inflation-fighter in the long run. The Fed's actions, including nearly tripling the size of its balance sheet to $2.2 trillion, pushing its short-term interest rate target to zero and undertaking a range of unconventional lending programs, have prompted some worries in the financial markets that a nasty burst of inflation could lurk around the corner.

In effect, Bernanke is spelling out the "how" of the Fed's plans to pull away extensive supports for the economy put in place during the economic and financial near-collapse that ended last year, though he remained vague about the "when."

One key step: Bernanke suggested that the federal funds rate, which for decades has been the Fed's main lever through which to manipulate the economy, will not be in the near future. Instead, when it comes time to raise interest rates, the Fed will likely focus on increasing the rate that the Fed pays banks for extra money they deposit with the Fed.

(More here.)

You have read this article with the title Bernanke outlines plan for pulling in stimulus aid. You can bookmark this page URL http://ogbcommunity.blogspot.com/2010/02/bernanke-outlines-plan-for-pulling-in.html. Thanks!