Tuesday, July 21, 2009

Bernanke: The Fed’s Exit Strategy

by Bill McBride on 7/21/2009 08:57:00 AM

Note: Federal Reserve Chairman Ben Bernanke testifies at 10AM today in front of the House Financial Services Committee. I'll post a video link ...

From Fed Chairman Ben Bernanke: The Fed’s Exit Strategy

The depth and breadth of the global recession has required a highly accommodative monetary policy. Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero. We have also greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit.

These actions have softened the economic impact of the financial crisis. They have also improved the functioning of key credit markets, including the markets for interbank lending, commercial paper, consumer and small-business credit, and residential mortgages.

My colleagues and I believe that accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner.
emphasis added
There is much more, but clearly the Fed expects policy to be accommodative for some time, and when the appropriate time comes, the Fed believes they have an exit strategy to avoid inflation.