The text of Bernanke's testimony opened with the following statement:
"Statement as prepared for delivery. The hearing was postponed due to inclement weather."
There's that snowstorm!
The testimony opened with the usual recount of how the crisis unfolded. Ben called attention to specific sources of dysfunction in the marketplace. Specifically a lack of confidence. Here is an excerpt:
"Our financial system during the past 2-1/2 years has experienced periods of intense panic and dysfunction, during which private short-term funding became difficult or impossible to obtain for many borrowers."
Then Bernanke went on to outline the Fed's response. This is a story we've heard time and time again.
The interesting part was a formal look into how the Fed intends to remove the market from it's direct and indirect accomodative influences.Ben shared that the market is no longer in need of many of the emergency funding outlets.
"As was intended, use of many of the Federal Reserve's lending facilities has declined sharply as financial conditions have improved.Some facilities were closed over the course of 2009, and most other facilities expired at the beginning of this month"
TAF and TALF (car loans, credit card loans, small business loans,student loans) are the only two facilities still in operation. Only the CMBS window will remain open and that operation closes on July 30, 2010
Ben says these programs were a success and no losses were borne from them.
"The Federal Reserve believes that these programs were effective in supporting the functioning of financial markets and in helping to promote a resumption of economic growth. The Federal Reserve has borne no loss on these operations thus far and anticipates no loss in the future. The exit from these programs is substantially complete"
After an update was shared on emergency liquidity programs, Ben moved onto the two elephants in the room: INTEREST RATE POLICY and ASSET PURCHASES (mbs and agency debt).
First, a very familar outlook was re-iterated. We've seen this in the text of the FOMC statement:
"The FOMC anticipates that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
But this was added on...
"In due course, however, as the expansion matures the Federal Reserve will need to begin to tighten monetary conditions to prevent the development of inflationary pressures."
Ben outlined several strategies that could be used including reverse repurchase agreements and increases on interest paid on bank reserves.
"Reverse repos and the deposit facility would together allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so."
We were reminded that the Fed is developing plans to offer 'term deposits' to depository institutions. These are similar to certificates of deposit that the institutions offer to their customers. Here is an excerpt explaining:
"The Federal Reserve would likely auction large blocks of such deposits, thus converting a portion of depository institutions' reserve balances into deposits that could not be used to meet their very short-term liquidity needs and could not be counted as reserves"
Lastly, we got an idea on how the exit might occur in terms of sequence of events, but nothing on timing. Ben said it would be a slow process as the Fed "tested" these programs with more and more market participants (in effect progressively draining reserves). Then Ben informed us what to expect when the Fed gets really serious about exit plans:
"The actual firming of policy would then be implemented through an increase in the interest rate paid on reserves. If economic and financial developments were to require a more rapid exit from the current highly accommodative policy, however, the Federal Reserve could increase the interest rate paid on reserves at about the same time it commences significant draining operations."
Plain and Simple: the Fed is feeling their way through this one step at a time. The plan has been outlined but the marketplace is very sensitive to policy shifts. Therefore the Fed must gradually evaluate market reaction to different methods of accomodative policy removal. The Fed is not likely to increase the overnight lending rate until the market is completely ready and all other options have been exhausted.
Then came what mortgage professionals are most interested in at the moment, the AGENCY MBS PURCHASE PROGRAM. That topic gets its own post. To be posted tomorrow when the Fed releases their Weekly MBS Purchase Totals.
