Bernanke Says Fed Ready To Rollback Stimulus, Absorb Reserves

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February 11, 2010 Thursday

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Bernanke says Fed ready to rollback stimulus, absorb reserves

Jacob Geiger

The Fed chairman said the central bank may offer term deposits when it seeks to drain reserves from the financial system.

In prepared testimony released Feb. 10 for the House Financial Services Committee, Federal Reserve Chairman Ben Bernanke said the central bank’s lending facilities have “declined” sharply in recent months and that only the Term Auction Facility and TALF remain in operation.

He said the TAF, an auction facility for depository institutions, will conduct its final auction March 8, while TALF will close March 31 for non-CMBS-backed loans and June 30 for CMBS-backed loans.

Bernanke also said in his prepared remarks that the Fed will consider further reducing the maximum maturity of discount window loans. At the height of the crisis, banks could hold those loans for 90 days, and they are currently allowed to hold them for 28 days. The chairman said an increase in the spread between the discount rate and the target federal funds rate may also occur in the near future.

During the height of the financial crisis, Bernanke said the Federal Reserve was extending about $1.5 trillion in total credit at the end of 2008. Last week, he said, the Fed’s total outstanding credit was roughly $110 billion.

Bernanke described these efforts as “further normalization of the Federal Reserve’s lending facilities” and said they are “not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy.”

The Fed is developing other tools to absorb or reduce reserves in the banking system, he said, allowing the central bank to lower the net supply of funds to money markets. He said the Fed may offer depository institutions term deposits via auction. Financial institutions moving deposits into those accounts would not be allowed to use that money to meet short-term liquidity needs and could not count the funds towards reserves.

Bernanke said the deposit facility along with traditional reverse repos would allow the Fed to drain hundreds of billions of dollars from the reserve banking system if it chose to do so.

Bernanke will not appear before the committee Feb. 10 because of weather conditions in Washington.

February 17, 2010