Bernanke’s comments, beginning with his op-ed that was published in yesterday’s Wall Street Journal and continuing into the early afternoon with his testimony on Capitol Hill, sent Treasuries higher and rates lower.
The Fed Chairman stressed the wide range of tools available to the Federal Open Market Committee including beginning to liquidate their portfolio of Treasuries and MBS, cutting back their lending facilities such as TALF, and entering into reverse repo agreements that pull money out of the system. Bernanke also discussed a new tool the Fed has at their disposal. In the fall Congress gave the Fed the authority to pay interest on reserves that banks are required to hold at the Federal Reserve. That rate is currently in line with Fed Funds (.25%), but can be adjusted to persuade some banks to either hold more than the required amount at the Federal Reserve or charge more on loans they make. Either of these outcomes would result in a contraction of money. Bernanke again said, “The FOMC anticipates that economic conditions are likely to warrant maintaining the federal funds rate at exceptionally low levels for an extended period”, maintaining the stance that although there are many things the Fed can do to pull back liquidity, they don’t plan to do anything for some time.
Bernanke of course did a little self glorification, citing the alphabet soup of programs like TALF, MMIFF, TSLF and CPFF. I agree that the financial landscape as a whole looks much better than it did last fall, but at times the programs appeared less like a series of calculated steps and more like the Fed was blindly throwing handful of darts at the board, and then cheering when one stuck. Many will argue that all of the programs were necessary. Others will say that programs like TALF will never reach their lofty goals, ($1 trillion anticipated vs. less than $30 billion done so far).
Bernanke’s speech quelled inflation concerns a bit as TIPS breakevens eased and the curve flattened. The risk still lies in the Fed’s ability to ratchet back the liquidity at the right time, both in term of using their tools effectively and being left to act independently.
Cliff J. Reynolds Jr., Investment Analyst
The Fed Chairman stressed the wide range of tools available to the Federal Open Market Committee including beginning to liquidate their portfolio of Treasuries and MBS, cutting back their lending facilities such as TALF, and entering into reverse repo agreements that pull money out of the system. Bernanke also discussed a new tool the Fed has at their disposal. In the fall Congress gave the Fed the authority to pay interest on reserves that banks are required to hold at the Federal Reserve. That rate is currently in line with Fed Funds (.25%), but can be adjusted to persuade some banks to either hold more than the required amount at the Federal Reserve or charge more on loans they make. Either of these outcomes would result in a contraction of money. Bernanke again said, “The FOMC anticipates that economic conditions are likely to warrant maintaining the federal funds rate at exceptionally low levels for an extended period”, maintaining the stance that although there are many things the Fed can do to pull back liquidity, they don’t plan to do anything for some time.
Bernanke of course did a little self glorification, citing the alphabet soup of programs like TALF, MMIFF, TSLF and CPFF. I agree that the financial landscape as a whole looks much better than it did last fall, but at times the programs appeared less like a series of calculated steps and more like the Fed was blindly throwing handful of darts at the board, and then cheering when one stuck. Many will argue that all of the programs were necessary. Others will say that programs like TALF will never reach their lofty goals, ($1 trillion anticipated vs. less than $30 billion done so far).
Bernanke’s speech quelled inflation concerns a bit as TIPS breakevens eased and the curve flattened. The risk still lies in the Fed’s ability to ratchet back the liquidity at the right time, both in term of using their tools effectively and being left to act independently.
Cliff J. Reynolds Jr., Investment Analyst
No comments:
Post a Comment