National Press Club

Bernanke Promises Exit Strategy, Transparency

February 19, 2009 | By Lorna Aldrich

Fed Chairman Ben Bernanke

Fed Chairman Ben Bernanke

Photo/Image: Marshall Cohen

Ben Bernanke, chairman of the Federal Reserve, explained how the Fed has used an “innovative” course of “credit easing” to address the current financial crisis at a Luncheon Feb. 18. Innovation is required, he said, because the conventional policies available to the Fed are insufficient. He reassured listeners that the result of such innovation – a doubling of the dollar value of the Fed’s balance sheet – will not be permanent; there is an exit strategy. He added that the institution is initiating public information programs to make policies more transparent.

The policy innovations he described consist of the Fed’s making loans to and purchasing financial assets from domestic institutions and swapping dollar credits for foreign currency credits with 14 foreign central banks, to ease credit globally.

Some observers, he noted, worry about the doubling because the expanded lending capacity could be inflationary when the economy recovers. In recovery, he assured his listeners, the Fed can shrink its balance sheet, partly because it has purchased short-term securities which will expire. He promised a smooth exit strategy.

Addressing another concern, risk of loss to the Fed from the innovative policies, he said the risk was extremely low; the assets are short-term and over-collaterized. The Bear Sterns and AIG operations affect only five percent of the Fed assets, Bernanke said. He added that the assets pay interest to the Fed.

Bernanke said the period between meetings of the Federal Open Market Committee, the Fed’s main policy body, and release of the minutes has been shortened and that the Fed will now release longer-term economic projections, so observers can judge the economic assumptions underlying policy measures. There will also be a Web site making information on Fed activities available.

During the question period, Bernanke avoided commenting on administration or congressional decisions associated with Treasury programs and the stimulus package. He said recovery requires both economic stimulus and stabilizing the banking and financial system.

The goal of policy, he said, is not to return to 2005 but to reach a long-term process of improved private balance sheets, implying more saving and less debt. For now, he said, public confidence to spend is needed. He quoted the Augustinian principle as, “Let me be moral, but not quite yet.”