Bernanke: Economy not out of the woods yet

By Jennifer Liberto, senior writer


WASHINGTON (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke told a congressional panel Thursday that the economy still needs some help, but acknowledged the need to begin to tighten credit to prevent inflation at some point.

"The economy continues to require the support of accommodative monetary policies," Bernanke said Thursday. "However, we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus."

In prepared testimony, Bernanke explained to the House Financial Services Committee how the Fed intends to roll back emergency liquidity programs. He repeated some points made last month in remarks the Fed released after his scheduled appearance was postponed due to a snowstorm.

Bernanke re-affirmed Thursday that the Federal Open Markets Committee expects conditions are "likely to warrant exceptionally low levels of the federal funds rate for an extended period."

He added that the Fed has tools to counter inflation "at the appropriate time," he said, although he didn't suggest when the appropriate time might be.

For the last 18 months, the Fed has bought mortgages, long-term Treasurys and the debt of mortgage finance firms Fannie Mae (FNM, Fortune 500) and Freddie Mac. (FRE, Fortune 500)

Bernanke laid out a plan to sell some of those mortgages, Treasurys and debt, by offering what's called reverse repurchasing agreements. Under those agreements, the Fed sells its securities to a third party while agreeing to rebuy them at some point in the future.

The second way the Fed plans to soak up money is to sell banks and financial firms the equivalent of certificates of deposit. In this case, the Fed gets a chunk of the bank's reserves in exchange for paying interest at a steady rate.

Concern about mortgage markets

These deposits would be auctioned off and banks couldn't count their investment in the Fed as cash or reserves.

One such exit that the Fed has begun is unwinding certain credit programs, including the Fed's purchase of mortgage-backed securities, one of several credit markets that froze up at the start of the crisis.

Expressing concerns that the market for mortgage-backed securities won't return, several lawmakers asked Bernanke if ending such a program will lead to problems in the housing industry, including hikes in mortgage interest rates.

Bernanke acknowledged that "mortgage rates might pop back up," but that, so far, "there seems to be very little negative reaction."

"While that market has not completely returned to normal, we've seen considerable improvement," he said. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 17,973.44 -162.28 -0.89%
Nasdaq 4,956.40 -26.41 -0.53%
S&P 500 2,084.75 -16.29 -0.78%
Treasuries 2.24 0.13 6.20%
Data as of 11:18am ET
Company Price Change % Change
Bank of America Corp... 16.42 0.42 2.63%
Apple Inc 128.42 2.01 1.59%
Citigroup Inc 53.46 -0.10 -0.19%
AT&T Inc 33.47 -0.53 -1.56%
Chesapeake Energy Co... 15.81 -0.11 -0.69%
Data as of 11:03am ET
Sponsors

Sections

The world's most valuable company is set to join the most exclusive market index in the world at last. More

The U.S. added 295,000 jobs in February and unemployment fell to 5.5%, the lowest level since May 2008. More

Frank & Oak, Airbnb, and Net-a-Porter are just a couple of companies investing in the antiquated medium. More

There's no end to the creative ways scammers will try to steal your identity and your money. And tax time is one of their favorite times of the year. Here's how to spot a top scam and protect yourself. More