Bernanke Gives Blueprint for Stimulus Pull-Back

Federal Reserve Chairman Ben Bernanke on Wednesday laid out the central bank's plan for exiting the private credit market and pulling back the trillions of dollars its funneled into the economy to stave off a repeat of the Great Depression.

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""These programs, which imposed no cost on the taxpayer, were a critical part of the government's efforts to stabilize the financial system and restart the flow of credit,"" ""Bernanke said in testimony"":http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm on Capitol Hill. ""As financial conditions have improved, the Federal Reserve has substantially phased out these lending programs.""

The Fed’s programs fashioned specifically to stimulate the housing market are on schedule to terminate within the next few months. The central bank’s $1.25 trillion program to purchase mortgage-backed securities (MBS) and GSE debt will end on March 31, but Bernanke left the door open for the renewal of such efforts should market conditions deteriorate too drastically and participation from private investors fails to pick up the slack.

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“These asset purchases, which had the additional effect of substantially increasing the reserves that depository institutions hold with the Federal Reserve Banks, have helped lower interest rates and spreads in the mortgage market and other key credit markets, thereby promoting economic growth,” Bernanke told lawmakers.

The Fed chief said he doesn’t expect the central bank to sell off the housing debt it’s bought “in the near term,” not until after the economy has strengthened further, and then it will be at “a gradual pace,” using reverse repurchase agreements.

The Term Asset-Backed Securities Facility Program (TALF) for new issues of commercial mortgage-backed securities (CMBS) will close on June 30. Bernanke said use of TALF “has declined sharply as financial conditions have improved,” and several recent CMBS deals â€" the first to hit the market in a year and a half â€" have, in fact, transacted without TALF support.

Regarding the closely watched federal funds benchmark rate, which currently sits near zero, Bernanke said he anticipates economic conditions to “warrant exceptionally low levels … for an extended period.”

“In due course, however, as the expansion matures the Federal Reserve will need to begin to tighten monetary conditions to prevent the development of inflationary pressures,” Bernanke said.

He assured lawmakers that the Fed is working to ensure that the tools are in place “to reverse, at the appropriate time, the currently very high degree of monetary stimulus. We have full confidence that, when the time comes, we will be ready to do so,” Bernanke said.