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.
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 the “basic outline” of the exit strategy policy makers agreed upon he’s “pretty confident” 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.”