Thursday, February 11, 2010

Bernanke Checks In

In his published remarks yesterday, Fed chair Ben Bernanke tried to outline some tentative steps to pull the Fed back from its heavy investments in the American economy. (Bernanke's testimony before Congress got canceled by the snowstorm.) The Fed's portfolio is currently at $2.29 trillion, more than $1.3 trillion of which has been added since the onset of the banking crisis in September 2008. Obviously, no one wants that state of affairs to continue, so Bernanke announced plans to sell much of the most recent holdings, including mortgages, Treasurys and debt from Fannie Mae and Freddie Mac.

The Fed is also going to take on banks' excess reserves as a sort of CD, giving them a nominal interest rate in return. Put together, these plans should "drain hundreds of billions of dollars of reserves from the banking system quite quickly," Bernanke wrote.

Unfortunately, as we saw yesterday, bank liquidity might not be the foremost of our problems, and these moves might affect just the far edges of the economy. The big question is, when does Bernanke foresee that he will raise interest rates from the current near-zero level? "At some point," he wrote. It would be easy to ridicule such a lack of specificity, but better to admit that you don't know when the economy will improve enough to warrant such a move rather than to lock yourself in to an unknowable target. At least we know interest rates will remain zero for some time yet. At least until the snow lets up.

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