Is Bernanke Ready To Raise Interest Rates?

While Bernanke spoke on Capital Hill about the Fed being prepared to tighten monetary policy, there is no indication that they will anytime soon. Bernanke emphasized to congress that the Fed would not sell security holdings until it is clear that a sustainable economic recovery is under way. See the following post from The Capital Spectator.

The snow didn't stop Ben. Blizzard or not, there were no stormy surprises in Fed Chairman Bernanke's testimony today in Congress. Yes, the central bank was contemplating an exit strategy, but nothing was imminent.

"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," he said, according to prepared remarks. "We have full confidence that, when the time comes, we will be ready to do so."

How might such an exit strategy unfold? Bernanke considered one scenario:

One possible sequence would involve the Federal Reserve continuing to test its tools for draining reserves on a limited basis, in order to further ensure preparedness and to give market participants a period of time to become familiar with their operation. As the time for the removal of policy accommodation draws near, those operations could be scaled up to drain more significant volumes of reserve balances to provide tighter control over short-term interest rates. The actual firming of policy would then be implemented through an increase in the interest rate paid on reserves. If economic and financial developments were to require a more rapid exit from the current highly accommodative policy, however, the Federal Reserve could increase the interest rate paid on reserves at about the same time it commences significant draining operations.

Nonetheless, he emphasized: "I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery."

Many commenters take Bernanke at his word. Calculated Risk, for instance, writes today in the wake of Ben's testimony: "It is unlikely that the Fed will raise the Fed Funds rate any time soon (very unlikely this year, and maybe not in 2011)."

But not everyone is so sure that low rates have long legs (still). Wall Street vet Larry Doyle opines that Bernanke today "just sent a very clear sign that he is getting ready to start tightening monetary policy."

As for Fed funds futures this afternoon, the market's still expecting more of the same for the foreseeable future: a 0%-0.25% Fed funds target rate.

The more things change...

This post has been republished from James Picerno's blog, The Capital Spectator.