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Bernanke admits he needs less conventional tactics
Federal Reserve Chairman Ben Bernanke signalled he is ready to dig deeper into the central bank's toolkit after cutting interest rates almost as much as he can, opening the door to a shift by policymakers this month.
- Agencies
- Published: 23:25 December 2, 2008
Washington: Federal Reserve Chairman Ben Bernanke signalled he is ready to dig deeper into the central bank's toolkit after cutting interest rates almost as much as he can, opening the door to a shift by policymakers this month.
Bernanke said on Monday he may use less conventional policies, such as buying Treasury securities, to revive the economy, because his room to lower the main US rate from the current one per cent level is "obviously limited." Even so, reducing the rate is "certainly feasible", he said.
Policymakers may decide at their next meeting, slated for December 15 to 16, on the details of carrying out such a shift, which might resemble the "quantitative easing" strategy the Bank of Japan (BOJ) pursued between 2001 and 2006 after driving interest rates close to zero. The Federal chief's readiness to rely more on adding reserves to the banking system prompted JP Morgan Chase economist Michael Feroli to refer to him as "Bernanke-san" in a note yesterday.
"This sets the stage for the Federal Reserve to be more formal in its adoption of quantitative easing," said Vincent Reinhart, the former Federal director of monetary affairs and now a scholar at the American Enterprise Institute in Washington.
The Bank of Japan is the only major central bank in modern times to rely on quantitative easing - the strategy of injecting more reserves into the banking system than needed to keep the target interest rate at zero.
Federal balance sheet
Steps Bernanke has taken so far have prompted some Federal officials and econ-omists to say the central bank is already pursuing such a policy. With an array of emergency-loan programs aimed at easing the worst credit crisis in seven decades, Bernanke has expanded the Federal balance sheet to Dh7.6 trillion as of last week, more than double the year-earlier level.
Feroli headlined his research note yesterday: "Bernanke-san goes further down the path of Quantitative Easing."
BOJ Governor Masaaki Shirakawa said in May that while the strategy "was very effective in stabilising financial markets," it had limited impact in remedying the crisis as banks wouldn't lend and companies wouldn't borrow.
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