Tuesday, Dec 02, 2008
Federal Reserve Chairman Ben S. Bernanke signaled he’s 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 policy makers this month.
Bernanke yesterday said he may use less conventional policies, such as buying Treasury securities, to revive the economy, because his room to lower the main U.S. rate from the current 1 percent level is “obviously limited.” Even so, reducing the rate is “certainly feasible,” he said.
Policy makers may decide at their next meeting Dec. 15-16 on the details of carrying out such a shift, which might resemble the “quantitative easing” strategy the Bank of Japan pursued in 2001-2006 after driving interest rates close to zero. The Fed chief’s readiness to rely more on adding reserves to the banking system prompted JPMorgan Chase & Co. economist Michael Feroli to refer to him as “Bernanke-san” in a note yesterday.
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“This sets the stage for the Federal Reserve to be more formal in its adoption of quantitative easing,” said Vincent Reinhart, the Fed’s director of monetary affairs until last year 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.
Fed’s Balance Sheet
Steps Bernanke has taken so far have prompted some Fed officials and economists 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 Fed’s balance sheet to $2.11 trillion as of last week, more than double the year-earlier level.