Federal Reserve Chairman Ben S. Bernanke said the central bank may decide to hold bonds on its $3.1 trillion balance sheet to maturity as part of a review of its strategy for an exit from record monetary easing.
Bernanke told lawmakers in Washington today that he expects to revisit “sometime soon” an exit plan that policy makers outlined in June 2011.
Under that plan, the Fed would cease reinvesting some or all principal payments from its securities, revise its interest- rate outlook, raise the federal funds rate and then start selling housing debt to eliminate it from the central bank’s portfolio in three to five years.
“The one thing we could do differently” is “hold some of the securities a little longer,” Bernanke said in response to questions from members of the House Financial Services Committee. “We could even let them just run off.”
Bernanke is the third policy maker in the last week to voice support for altering the central bank’s exit strategy to delay or eliminate asset sales. Governor Jerome Powell said Feb. 22 that the Fed could refrain from sales to avoid causing market disruptions and having the Fed take losses on the securities as interest rates rise.
San Francisco Fed President John Williams told reporters after a Feb. 21 speech in New York that, given the increase in the Fed’s balance sheet, the period of time over which it’s appropriate to sell assets “probably has lengthened.” Telling markets the Fed plans to hold assets for longer would strengthen monetary stimulus and be “beneficial to the economy,” he said.
Bernanke echoed that view today. “One issue is how long to hold the securities and whether to use that as a substitute, an alternative to asset purchases,” he said. “That’s something worth discussing.”
The Fed is purchasing $85 billion of Treasury and mortgage- backed securities a month in an effort to spur the economy and reduce a jobless rate that stood at 7.9 percent in January.
If the central bank refrains from sales “the primary benefit is they will not distort the financial system and they don’t run the risk of adding price instability into those markets,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “That has always been a concern of the Fed.”
Bernanke said today the central bank’s easing policies are helping to improve demand for homes and cars by lowering long- term interest rates.
The Fed chairman said he’s “pretty confident” that the “basic outline” of the exit strategy policy makers agreed upon would “still be in force.”
If the Fed doesn’t sell any securities, “it doesn’t mean that our balance sheet is going to be large for many years,” he said. “It just would be maybe an extra year. That’s all it would take to get back down to a more normal size.”
The Fed’s record $3.1 trillion balance sheet includes $1.74 trillion of Treasuries, $1.03 trillion of mortgage-backed securities and $74.6 billion of Federal agency debt as of Feb. 20. In 2007, prior to the financial crisis, the total balance sheet was less than $900 billion.
In other remarks today, Bernanke said recent increases in some interest rates may signal the economy is gaining vigor.
“The fact that interest rates have gone up a bit is actually indicative of a stronger economy,” he said.
The world’s largest economy has shown signs that it will resume growth after gross domestic product unexpectedly shrank 0.1 percent in the fourth quarter. Reports today showed that orders for U.S. durable goods excluding transportation gear jumped in January by the most in a year and contracts to buy previously owned homes climbed more than forecast.
“We are getting some traction in the housing market, in automobiles and other durable goods” and to “some extent in investment” and commercial real estate, Bernanke said.
U.S. stocks rose, sending the Standard & Poor’s 500 Index higher for a second day, amid economic optimism after the better-than-estimated housing and durable goods data. The S&P 500 climbed 1.3 percent to 1,515.99 at the close in New York.
Fed policies also helped to lift the index to a five-year high on Feb. 19 (SPX), giving support to consumer spending. Bernanke said yesterday in testimony that U.S. share prices don’t appear to be overvalued.
Some interest rates have risen in recent months. The rate on a fixed 30-year mortgage climbed to 3.56 percent in the week ended Feb. 21 from a low of 3.31 percent on Nov. 22, according to data from Freddie Mac.
The yield on the 10-year Treasury note was 1.90 percent at about 4:23 p.m. in New York, up from a record low of 1.379 percent on July 25.
-- With assistance from Daniel Kruger in New York. Editors: Mark Rohner, Carlos Torres
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