Fed chairman Ben Bernanke has been speaking. He hasn’t said much that’s new, but he does provide a very good basic description of the Fed’s ballooning balance sheet.
Here are a couple of the few highlights that we could pick out. Firstly on the Fed’s quantitative easing – via direct purchasing of Treasuries:
The Fed’s holdings of high-quality securities are set to grow considerably as the FOMC, in an attempt to improve conditions in private credit markets, has announced large-scale open-market purchases of these securities. Specifically, the Federal Reserve will purchase cumulative amounts of up to $1.25 trillion of agency MBS and up to $200 billion of agency debt by the end of the year, and up to $300 billion of longer-term Treasury securities over the next six months. The principal goal of these programs is to lower the cost and improve the availability of credit for households and businesses. As best we can tell, so far the programs are having the intended effect. For example, 30-year fixed mortgage rates, which responded very little to our cuts in the target for the federal funds rate, have declined 1 percentage point to 1-1/2 percentage points since our first MBS purchase program was announced in November. Over time, lower mortgage rates should help to improve conditions in the housing market, whose persistent weakness has had a major impact on economic and financial conditions more broadly, and will improve the financial condition of some households by facilitating refinancing. In addition, open-market purchases should benefit credit markets by adding liquidity and balance sheet capacity to the system.
And on the liabilities side of the balance sheet:
The FOMC will continue to closely monitor the level and projected expansion of bank reserves to ensure that–as noted in the joint Federal Reserve-Treasury statement–the Fed’s efforts to improve the workings of credit markets do not interfere with the independent conduct of monetary policy in the pursuit of its dual mandate of ensuring maximum employment and price stability. As was also noted in the joint statement, to provide additional assurance on this score, the Federal Reserve and the Treasury have agreed to seek legislation to provide additional tools for managing bank reserves.
Roughly translated: We’re aware of the inflation risk. End speech.
Related links:
The Federal Reserve’s Balance Sheet – Ben Bernanke
The Fed’s new balance sheet - Econbrowser
Bernanke to take over the world – FT Alphaville
Analysts react: Dollar dead, Fed credibility shot – FT Alphaville