Ben Bernanke has unveiled a sweeping plan to retreat from the historic low interest rates and easy money that helped stave off economic ruin.
But the U.S. Federal Reserve Board chairman did not specify on Wednesday exactly when he'll put his exit strategy into action, warning that the economy remains too weak to shift course now.
"When the time comes, we will be ready to do so," Mr. Bernanke vowed in remarks prepared for a U.S. congressional hearing that was postponed after a second major snowstorm to hit Washington in the past week shut down the government for a record third straight day.
The U.S. economy "continues to require the support of accommodative monetary policies," Mr. Bernanke insisted, repeating the now-familiar refrain that the Fed would keep interest rates low for "an extended period."
That means no imminent interest rate hike, and no immediate move to shrink the Fed's swollen balance sheet, economists said.
The centrepiece of Mr. Bernanke's plan is a radical shift in the way the central bank exerts its clout over short-term interest rates, at least temporarily. He is proposing to gradually raise the interest rate on deposits held at the Fed - in effect, paying banks to park their cash rather than lend it to businesses and consumers.
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That's a move away from the Fed's three-decades-old practice of using the federal funds rate, or the rate banks charge each other for cash, as its primary tool to control credit.
The problem is that the federal funds rate has been set near zero since the recession began.
"The reason for shifting to the alternate target (at least temporarily) is quite simple," explained Millan Mulraine, economics strategist at TD Securities in Toronto. "The Fed's ability to directly influence the fed funds rate could be compromised by the massive amount of excessive liquidity held in the system."
Morgan Stanley economist David Greenlaw said Mr. Bernanke's remarks reinforce "the notion that the progress toward an eventual Fed exit is under way."
Indeed, few economists expect any move by the Fed to force up interest rates until next year because of the weak job market, feeble demand for credit and persistent weakness in housing. Some even say the Fed won't move at all next year.
"The Fed is carefully laying the ground work to begin tightening policy, but is not expected to act for quite a while longer," BMO Nesbitt Burns senior economist Michael Gregory said in a research note.
Stocks in the United States edged down as Mr. Bernanke's testimony reminded investors that rates will inevitably rise at some point. But financial stocks benefited because it was clear the Fed chief wasn't planning to tighten credit any time soon.
Since the credit crisis erupted in late 2007, the Fed has doubled the size of it balance sheet - to $2.2-trillion (U.S.) - in a bid to prop up financial markets. It has scooped up mortgage-backed securities and bonds issued by government-controlled mortgage lenders Fannie Mae and Freddie Mac.
Mr. Bernanke said the plan is to gradually shrink its balance sheet to more normal levels and get back to holding strictly government Treasury bills as those securities mature.
And he insisted that the Fed would not sell any of those assets "in the near-term" and only after it has begun pushing up interest rates.
Mr. Bernanke also laid out his preferred options for reducing its balance sheet, including reverse repurchase agreements, offering term deposits to commercial banks, and redeeming or selling securities.
"Reverse repos and the deposit facility would together allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so," he said.
Mr. Bernanke did signal one near-term move, and that's a likely increase in the "discount rate" charged on direct loans to banks. The rate is currently set at 0.5 per cent, or slightly higher than the zero-to-0.25-per-cent range for the federal funds rate.
But he cautioned that it was simply part of the "normalization" of Fed lending and not a change in monetary policy.
Mr. Bernanke had been slated to deliver his remarks to the U.S. House of Representatives financial service committee and take questions from lawmakers. But with the hearing postponed, he posted his 10-page remarks on the Fed's website.