Federal Reserve Chairman Ben Bernanke assured Congress and the public today that record-low interest rates will remain in place to bolster moderate economic growth and what is likely a slow improvement in the unemployment rate.
Speaking before the House Financial Services Committee, Bernanke reiterated his non-specific timetable for a possible resumption of increases on the key federal funds rate – the overnight interbank borrowing rate – which has been at 0-.25 since December 2008.
He also conceded that some may question the Fed’s use of emergency authority in propping up the financial markets during the crisis, and welcomed a review of the central bank’s “management” of that authority.
“Although the federal funds rate is likely to remain exceptionally low for an extended period, as the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures,” Bernanke said.
The Fed chief is heading into an extremely delicate balance act – deciding when to pull the trigger on raising rates again to head off possible inflation but without derailing the tender economic recovery. Waiting too long, though, fuels speculative market conditions that could also be detrimental to the economy.
The Fed last week surprised markets by raising the discount rate, which it charges on emergency loans to banks. But it left untouched the funds rate, its main and most watched policy tool.
Any resumption in the increase of the funds rate would be felt by U.S. households in due time. It could mean higher rates on credit cards, car financing, home equity lines and, eventually, primary mortgages.
“These changes, like the closure of most of the special lending facilities earlier this month, are in response to the improved functioning of financial markets, which has reduced the need for extraordinary assistance from the Federal Reserve,” Bernanke said.
Last month, the Fed announced the closure of several lending facilities that were needed to infuse liquidity into the financial markets during the height of the speculative markets crisis that fueled the worst recession in decades.
Two more anticipated expiration dates remain. The Term Asset-Backed Securities Loan Facility, which has a deadline of June 30 for loans backed by new-issue commercial, mortgage-backed securities. And March 31 will mark the wind-down of loans backed by all other types of collateral.
The credit and liquidity programs may have drawn skepticism with lawmakers and the public, Bernanke said, before offering to cooperate with any review.
“While the emergency credit and liquidity facilities were important tools for implementing monetary policy during the crisis, we understand that the unusual nature of those facilities creates a special obligation to assure the Congress and the public of the integrity of their operation,” Bernanke said. “Accordingly, we would welcome a review by the GAO of the Federal Reserve’s management of all facilities created under emergency authorities.”
The GAO, General Accounting Office, is the investigative arm of Congress.
