Bernanke Stresses Need for Low Rates

The Wall Street Journal

25 Feb  2010

Fed Chairman Ben Bernanke spoke to a House committee Wednesday.

WASHINGTON—After taking several small steps recently to take the financial system off life support, Federal Reserve Chairman Ben Bernanke made clear Wednesday that he wasn’t close to the more momentous act of raising interest rates, thus tightening credit.

In his semi-annual testimony to Congress on the economy and monetary policy, Mr. Bernanke said that short-term interest rates, now near zero, were likely to remain there for at least several more months.

He highlighted worries about what he called the “nascent recovery”—marked by high unemployment, wobbly real-estate markets, weak lending and large budget deficits. Mr. Bernanke said slack in the economy meant the benchmark federal-funds rate would remain near zero for an “extended period.”

The economy, he said, “still requires support for recovery.”

Investors were heartened by Mr. Bernanke’s tone. The Dow Jones Industrial Average finished up 91.75 points, or 0.9%, at 10374.16. Treasury bonds were little changed. Futures markets put more than 80% odds on the Fed lifting its benchmark federal funds rate to 0.5% by November from current levels of 0.25%

“The fact that Chairman Bernanke reiterated the pledge in his testimony today has clearly increased the risk that the tightening cycle starts later than we currently think—maybe not until early 2011,” said Harm Bandholz, an economist with Unicredit Bank.

The Fed this month ended several emergency lending programs that funneled credit directly to investment banks, blue-chip companies and central banks overseas. Last week, it also raised a rate it charges on emergency loans to banks. Moreover, Mr. Bernanke reiterated his plan to finish purchasing $1.25 trillion worth of mortgage-backed securities by the end of March, a program meant to drive down lending rates which Mr. Bernanke said would have lingering positive effects.

Those moves have left some investors and lawmakers unsettled about the Fed’s plans for the broader economy. Mr. Bernanke tried to draw a distinction between emergency lending programs aimed at propping up a now-healing banking system and his broader efforts to support still-weak economic growth.

“Is there a connection between the increase in the amount of money that [banks] have to pay [on emergency loans] and households’ interest?” Rep. Maxine Waters (D., Calif.) asked. “I don’t think any,” Mr. Bernanke replied.

Congress has been hostile territory for the Fed chairman for much of the past year, where lawmakers have attacked the Fed’s rescues of American International Group Inc. and its disclosure policies.

At Wednesday’s hearing, the Fed chairman had an unusual exchange with one of his main congressional nemeses, Rep. Ron Paul (R., Texas), who wants to subject Fed decisions to more scrutiny by Congress.

Mr. Paul suggested the Fed had been involved in the 1980s in making secret loans to Iraq’s former strongman Saddam Hussein, and that Fed money funded the Watergate break-in that brought down Richard Nixon.

Mr. Bernanke shot back that the allegations are “absolutely bizarre, and I have absolutely no knowledge of anything remotely like what you just described.”

Mr. Bernanke did make an offer to increase disclosure on one front. He said he would support proposals that would require the Fed to disclose the names of some firms that turned to it during the crisis for loans under temporary lending programs.

The Fed has been resistant to naming borrowers for fear it would stigmatize them in the markets and damage their ability to get private funding. However, he said firms that used temporary crisis programs could be named if Congress demands it.

Among those that could be disclosed are blue-chip companies, investment banks and hedge funds, all of which used various temporary programs offered by the Fed amid the financial crisis.

Those programs have expired or will expire in the next few months.

Mr. Bernanke drew a line on disclosing names of banks that come to its traditional lending facility, known as the discount window. He said that naming them would make the discount window less effective and undermine the stability of the financial system.