Bernanke Suggest Fed Abandon Fed Funds Rate, Keep Balance Sheet Large

        By Ben Leubsdorf
        The Federal Reserve may want to change the way it controls short-term interest rates and maintain a larger asset portfolio than it did before the financial crisis, former Fed chairman Ben Bernanke said Wednesday.
        Control of monetary policy "might be more, rather than less, effective" if the Fed moved away from targeting a benchmark interest rate called the federal funds rate, Mr. Bernanke said in remarks during a panel discussion hosted by the International Monetary Fund in Washington D.C.
        The fed funds rate is a rate banks pay each other for overnight loans of reserves, which are the deposits they keep with the Fed. Because the Fed has flooded the financial system with reserves, these rates have been pushed toward zero and banks don't trade them much anymore.
        Instead of focusing on the fed funds market, Mr. Bernanke said the Fed should consider targeting a market rate known as the "repo rate," where financial institutions are very active, or some other short-term money market rate.
        He endorsed the Fed using two new instruments to manage rates: interest it pays on banks' excess reserves and an interest rate it pays on transactions called reverse repurchase agreements, or reverse repos. Fed officials have been reluctant to use reverse repos very aggressively, but he played down those concerns.
        Mr. Bernanke, who left office in early 2014, spoke as the Fed is preparing to raise short-term rates that have been pinned near zero since December 2008. Officials have said they expect to begin raising rates this year, though the precise timing for the first increase remains uncertain.
        The Fed has for years used the fed funds rate to tighten or loosen credit in the economy. In the past, the Fed changed the rate by increasing or decreasing the amount of reserves in the banking system. But because of the huge amount of reserves now, it will use new tools to manage interest rates.
        The central bank said last year it plans to continue setting a target range for the fed funds rate. It will use the interest rate on excess reserves to help guide it. Its reverse repo facility will play a supporting role.
        Mr. Bernanke called the fed funds market "small and idiosyncratic," and said he saw a larger role for the overnight reverse repo program.
        Some Fed officials have expressed wariness about the reverse repo program, saying it could pose a risk to financial stability by offering a safe haven for money during times of stress.
        Mr. Bernanke said he recognizes the concern, but "regulatory action to minimize the risk of or incentives for runs would seem to be the more direct way to deal with the issue."
        Fed officials also have said that, over time, the central bank's balance sheet--its portfolio of bonds and other assets--should shrink to "the smallest level consistent with efficient implementation of monetary policy," according to minutes of their July 2014 meeting.
        Mr. Bernanke said Wednesday that policy makers may want to keep the balance sheet larger than it was before the crisis.
        "Of course, I have not been privy to the internal discussions, having left the Fed more than fourteen months ago, but I wonder if the case for keeping the balance sheet somewhat larger than before the crisis has been adequately explored," he said.
        There would be a number of advantages, he said, and even with a large balance sheet, the Fed should be able to effectively adjust policy.
        "Most other major central banks have permanently large balance sheets and are able to implement monetary policy without problems," Mr. Bernanke said.
        (END) Dow Jones Newswires

        April 15, 2015 17:21 ET (21:21 GMT)

#FX
#Forex
#BernankeSuggest
#BernankeDecision
#FedFunds
#FedRate
#SheetLarge
#KeepBalance