WASHINGTON Federal Reserve Chairman Ben Bernanke on Friday said the Fed's buying of longer-dated U.S. Treasuries would "taper off" when the economy no longer needed help, allowing the Fed to cease its emergency support.
"The time will come when the economy will be growing, the housing market will be recovering, that support will no longer be needed. And we will of course at that point taper off that support," Bernanke told community bankers in Phoenix, Arizona.
The U.S. central bank on Wednesday surprised investors with plans to buy up to $300 billion of longer-term U.S. Treasury securities and an additional $850 billion of agency mortgage debt to ease a deepening U.S. recession. It also confirmed it would hold interest rates near zero for "an extended period".
"We are very much aware that we don't want to be in the credit markets forever. We need to help them now, but we want to have an exit strategy, and allow those markets to recover and become again fully private sector," Bernanke said in response to an audience question after delivering a speech.
It was the first time the Fed had bought longer-dated Treasuries since the 1960s. The news sent yields sharply lower, while on the foreign exchange markets it inflicted the biggest decline in the dollar in 25 years.
Bernanke said the Fed had decided to expand its aid for the mortgage sector and buy Treasury securities to "support the housing market, the broader economy."
Economists said the Fed was effectively printing money by buying debt issued by the U.S. government, and then recycling all proceeds from this investment back to the Treasury.
In terms of policy, it is equivalent to the quantitative easing strategies employed by Japan during the 1990s to end deflation and a decade of miserable economic performance.
Quantitative easing was needed, with rates already at zero and deflation a genuine threat, Federal Reserve Bank of St Louis President James Bullard said in a presentation at a policy workshop at the Bank of France in Paris.
"Moving to quantitative approaches to policy is feasible and is going on right now," Bullard told the workshop, according to his presentation on the St Louis Fed website.
He also emphasized the risks of deflation, citing the experience of Japan, where widespread declining prices following the collapse of a property and stock market bubble made the economic downturn much worse.
"Deflation is a real possibility in the current environment important near-term goal for monetary policy is to prevent this outcome," said Bullard, who is not a voting member of the Fed's policy-setting committee this year.