Bernanke Signals Asset Sales May Have Bigger Role (Update1)
By Scott Lanman and Craig Torres
March 25 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke signaled that sales of the central bank’s holdings in mortgage-backed securities may play a more prominent role in the withdrawal of monetary stimulus than he indicated last month.
“I anticipate that at some point we will in fact have a gradual sales process,” Bernanke said today in testimony to the House Financial Services Committee. In prepared remarks, he avoided repeating a February statement that the Fed won’t sell any securities “at least until after policy tightening has gotten under way.” Instead, he said today the tool is one way of “applying monetary restraint.”
By selling the assets, the Fed would reach its objective of holding only Treasury securities and return its $2.32 trillion balance sheet to levels prior to the financial crisis, Bernanke said. The Fed plans this month to complete buying $1.25 trillion of the housing debt, a program begun in January 2009 to lower home-loan rates and revive the economy.
“Unless you are selling assets, you are not meaningfully and convincingly reducing the size of the balance sheet,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. LLC in New York.
The change in part reflects discussion among Fed policy makers at the Jan. 26-27 meeting, as reported in minutes released by the central bank. Some officials pushed to start selling assets in the “near future,” the minutes said. All participants agreed that Fed assets and banks’ excess cash would need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries.
‘Reasonable’ Time
“We would like to get back to an all-Treasury portfolio within a reasonable amount of time,” Bernanke said in response to a question from Representative Jeb Hensarling, a Texas Republican. The balance sheet should eventually be reduced to less than $1 trillion, Bernanke told Representative Ron Paul, also a Texas Republican, who advocates abolishing the Fed.
Prior to the financial crisis, the Fed limited its open- market operations to Treasuries to avoid the perception that it was intervening in a particular industry or market. The balance sheet rose to a record $2.32 trillion as of yesterday, surpassing the prior high in December 2008.
The central bank chief and his colleagues have been outlining their strategy for tightening credit in time to prevent the recovery from stoking inflation. Officials are concerned that the federal funds rate, their main policy tool for 20 years, isn’t as effective as before in influencing borrowing costs.
Raising the interest rate paid on funds deposited by banks at the Fed, as well as so-called reverse repurchase agreements that temporarily drain cash from the banking system, will still be among the main tools for tightening credit, Bernanke said.
‘Not Comfortable’
“The FOMC is not comfortable with holding all of these securities until they mature, as some would be 30 years, and we want to move more quickly than that back to the pre-crisis balance sheet,” Bernanke said. The Fed wouldn’t sell assets in a “really weak economy,” he said.
The FOMC has been debating the topic of asset sales for months. James Bullard, president of the St. Louis Fed, called asset sales “very much a live issue at the FOMC right now” in a March 4 speech in St. Cloud, Minnesota.
“It may make some sense to make adjustments on the quantitative easing side,” Bullard said. Asset sales could happen “while you are waiting to raise the short-term interest rate,” he said. Richmond Fed President Jeffrey Lacker has also been an advocate of asset sales.
At the same time, Bernanke didn’t say when the Fed would begin executing its strategy. He said the U.S. economy still needs low interest rates and that the central bank will be ready to tighten credit “at the appropriate time.”
‘Accommodative’ Policies
“The economy continues to require the support of accommodative monetary policies,” Bernanke said in prepared testimony, repeating parts of a statement to the panel from last month.
Treasury two-year notes fell today, pushing the yield up one basis point, or 0.01 percentage point, to 1.1 percent at 3 p.m. in New York. The Standard & Poor’s 500 Index rose 0.6 percent to 1,174.10.
Today’s hearing, originally scheduled for Feb. 10, was postponed because of a snowstorm. The Fed went ahead and released Bernanke’s prepared testimony that day, in part to lay the groundwork for a planned increase in the interest rate the central bank charges for direct loans to banks.
Responding to questions, Bernanke said the “unemployment situation is very weak,” and the housing market is “still quite weak.”
$1 Trillion
The New York Fed said March 8 that it would use money- market mutual funds to eventually help drain as much as $1 trillion from the financial system so the central bank can tighten credit and raise interest rates. The Fed said in a statement on the reverse-repurchase agreement program that “no inference should be drawn about the timing of any prospective monetary-policy operation.”
That move may be months away. U.S. central bankers will begin raising rates at the Nov. 3 FOMC meeting and increase the benchmark lending rate to 0.75 percent by the end of the year, according to the median estimate of economists surveyed by Bloomberg News from March 1 to March 10.
No comments:
Post a Comment