Bernanke Outlines the Fed's Exit Strategy

On Tuesday Treasury markets signalled re-emerging confidence that the Federal Reserve may be able to absorb the oceans of liquidity it has pumped into markets in the last 2 years. The nice rally across the curve based on an OpEd piece by Fed chairman Ben Bernanke in the Wall Street Journal.
As the investment world has grown wary of the explosive growth of the Fed's balance sheet since last September Bernanke stressed the argument that this has helped to mitigate the problems in the economy. According to Bernanke historically low Fed funds rates will be with us as long as there is a recession, but the Fed acknowledges the need to raise interest rates to avoid higher inflation.
Looking at such key indicators like industrial production and the labor market I am left with the question when we will see growth in the USA again. Bernanke did not specify any time frame for the recovery.
The Fed head also pointed out that he has an arsenal of tools to tighten monetary policy despite an inflated balance sheet:

Even if our balance sheet stays large for a while, we have two broad means of tightening monetary policy at the appropriate time: paying interest on reserve balances and taking various actions that reduce the stock of reserves. We could use either of these approaches alone; however, to ensure effectiveness, we likely would use both in combination.

Citing the ECB, Bernanke sees a way to put a floor below short term rates.

Considerable international experience suggests that paying interest on reserves effectively manages short-term market rates. For example, the European Central Bank allows banks to place excess reserves in an interest-paying deposit facility. Even as that central bank’s liquidity-operations substantially increased its balance sheet, the overnight interbank rate remained at or above its deposit rate. In addition, the Bank of Japan and the Bank of Canada have also used their ability to pay interest on reserves to maintain a floor under short-term market rates.

Toni Straka

Editor, the Prudent Investor

Also by Toni Straka

Toni Straka is an INDEPENDENT Certified Financial Analyst (OeVFA, EFFAS) who worked as a financial journalist for 15+ years and now evaluates global market trends. Analyzing financial and political news permanently he wants to share his insight with those who understand that we are in an era of global redistribution of wealth. The US-European centric approach does not work anymore. Five billion people in the developing countries now demand their fair share of the world's resources.