Federal Reserve’s exit strategy
Federal Reserve Chairman Ben Bernanke provided the following statement to the U.S. House of Representatives Committee on Financial Services this morning.
In our view, the notable points from the statement are:
- Most of the emergency credit facilities have been closed
- The amount of credit extended has declined more than 90% from $1.5 trillion to $110 billion.
- The Fed has incurred $0 ZERO losses from all extended credit and expects no losses on remaining credit
- The Fed wants Congress to devise a regulatory framework for dealing with failing institutions so that it does not have to step in.
- Expect the discount rate spread to return to 100 basis points in the future as conditions improve. (currently 25 basis points).
- Discount window does not work due to ‘stigma’. Fed needed to create TAF to work around stigma issues. No mention was made to fixing this discount window ‘stigma’ problem, but this NEEDS to be addressed at some point in our view.
- Length of discount window loans was extended from 1 day to 90 days, now back to 28 days. Will likely return to overnight loans in the future.
- Fed has purchased $1.25 trillion of agency MBS, $300 billion Treasuries, $175 billion agency debt. Agency debt and Agency MBS is not being replaced as it matures. Treasuries are being rolled into new purchases.
- Lots of tools exist to remove excess liquidity and tighten policy when the time comes: a) interest on reserves b) expanded reverse repos program c) term deposits (CD) facility d) selling holdings