Massive Federal Reserve spending is still needed to underpin the crisis-battered US economy, chairman Ben Bernanke told lawmakers Thursday, even as he spelled out the Fed's tentative exit strategy.
Bernanke said the central bank would "at the appropriate time" be ready to drain away hundreds of billions of dollars in crisis stimulus that helped rescue the US economy, but indicated that time had not yet come.
"We have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus," Bernanke told Congress. "We have full confidence that, when the time comes, we will be ready to do so."
|Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill in Washington DC.|
Underscoring the depth of the crisis that has rocked the global economy, Bernanke said large-scale Fed intervention was still needed, along with record-low interest rates.
"Our financial system during the past two-and-a-half years experienced periods of intense panic and dysfunction," he said. "The economy continues to require the support of accommodative monetary policies."
Last week the Fed policymakers decided to leave their main interest rate at zero to 0.25 percent, a record low, citing the still stabilizing labor market.
Although growth has returned to the US economy, unemployment remains at 9.7 percent. Bank lending and the real estate markets remain depressed.
To keep money flowing through the economy during the crisis, the Federal Reserve has provided credit to gummed-up markets, mopped up troubled mortgage-backed assets and bought hundreds of billions of dollars of US government debt.
As a result, it today has 2.3 trillion dollars worth of assets on its books, a trillion-plus more than it did in August 2008, before the crisis.
But Bernanke faces tough choices about when and how to normalize monetary policy and faces intense political scrutiny of his choices.
Some fear that tightening credit too quickly will hamper the economic recovery and cause already-slow job creation to grind to a halt, or go into reverse.
Others are concerned that keeping this much Fed cash sloshing around the economy will eventually cause debilitating inflation.
Bernake tried to assuage the fears of both camps.
"The sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments and on our best judgments about how to meet the Federal Reserve's dual mandate of maximum employment and price stability," he said.
But Bernanke ever-so-tentatively indicated how the Fed might exit its current crisis mode.
He said the Fed would phase-out some of its largest liquidity programs by June 30 this year and vowed the Fed would reduce its balance sheet to under a trillion dollars.
"Restoring the size and composition of the balance sheet to a more normal configuration is a longer-term objective of our policies," he said.
Bernanke also outlined mechanisms to create time-limited deposits for banks that would help the Fed "drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so."