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Bernanke: At Some Point, Fed Will Need to Tighten Financial Conditions

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In the testimony given on February 10 before the Committee on Financial Services, Bubblicious Ben Bernanke acknowledged the equivalent of saying all life ultimately dies: "at some point the Federal Reserve will need to tighten financial conditions."

Although Bernanke didn't enlighten anyone to the inevitable tightening phase, he did begin to offer some prospective exit strategies for early feedback. Here is the Cheat Sheet of his testimony:

  1. The economy entered a stage of "panic and dysfunction." Lending froze.
  2. The Fantastic 4, I mean, Federal Reserve galloped to the rescue with injections of secret short-term loans, zero interest rates, and large-scale purchases of Treasury and agency securities.
  3. Problems in the US spread abroad, so the Fed lent money to foreign central banks.
  4. The Fed used more emergency lending powers to deal with Bear Sterns and AIG.
  5. By June 30, the remaining special loan facilities (TAF, TALF) will be phased out. The length of short-term loans will recede to from 90-days to 28-days, and "before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate."
  6. The Fed plans to increase interest rates on bank reserves, reduce the net quantity of reserves (e.g., reverse repos), offer depository institutions term deposits, redeem or sell securities, and use "other tools."
  7. The sequencing of Fed action is contingent on future circumstances and will be communicated later.

Only time will tell whether the high priests of finance can pull the right levers to return to normalcy. One thing is for sure: it's going to be a long time.

[Source: Federal Reserve Exit Strategy Testimony]