commitment to purchase about $1.25 trillion of mortgage-backed securities. the immediate result of the fed's action were to expand the balance sheet dramatically and to put in unprecedented volume of money into the banking system. . .

has suged this is a delicate balancing act that will have to be done just right to avoid significant damage to the economy. if recent history is any guide any decisions the fed makes to carry out this delicate balancing act regardless of what these decisions are will be second guessed by the congress and the public and this could also lead to questions about the independence of the fed. i'm hopeful that we can use this hearing to understand better the policy options available to the fed to unwind these programs and the potential policy simply casing of these various options. at the psalm time i think we should be -- same time i think we should be careful not to infringe on the fed's ability and willingness to exercise this independent judgment about which options will be the most desirable and effective. so i view this hearing as an effort to educate members of

our committee not as a forum for us to try intimidate or browbeat the fed into pursuing specific options. we have asked the witnesses to provide information about specific monetary policy tools and option that are available to the fed including paying interest only reserves, entering reverse repurchase agreements utilizing the recently introduced term deposit facility conducting direct access sales of the market backed securities it has purchased and any other options that might be appropriate. we need to understand the projected advantages and disadvantages of each option so we'll understand better what the fed is doing when it uses particular options and perhaps even be in a position to explain to our constituents why a particular steps are being taken. i look forward to chairman bernanke telling us how the

fed can effectively unwind its emergency liquidity programs while reducing inflationary fears, encouraging job growth and managing the fragile economic recovery knowing full well that we all expect him to be the master conductor who will wave the magic want and lead -- warnd and lead our economy to play sweet music again. with that i'll submit the balance of my statement for the recordize mr. paul of texas for three minutes. the ranking member of the domestic monetary policy subcommittee. >> i thank you mr. chairman. and welcome chairman bernanke. on february 24th we had our humphrey hawkins meeting here and i asked questions about some of the things the fed had done in the past and the comments that you made included the fact that you considered this rather bizarre what i was saying

chairman frank followed up with sending a letter to get some clarification for you to look into it and even suggested that you and i get together so i can present what my concerns are and see if we can resolve it and i'm certainly open to that so i hope that we can follow up on that and the suggestions of chairman frank. but also i wanted to make a comment about the march 19th ruling at the u.s. court of appeals in manhattan because once again the federal reserve lost their case against i guess it was bloomberg filing for freedom of act for information dealing with a $2 trillion loans during the crisis. and of course that was ruled in lower court and the court of appeals as upheld this and main argument the fed uses in the court as well as here in the hearings is that if we knew so much about these banks and where these loans are going to stigmatize

these companies and banks and do harm to their reputation and make problems worse i sort of understood that argument even though i don't agree with it because in a way that challenges the whole notion of what the sec exists for. they want accounting procedures. they don't want to hide information and if they do if it's not out in front it deceives the investors so in a way the sec is fighting to get information to notify investors and if they don't do it right they get charged with fraud. but it seems to be perverse that the federal reserve takes a different position that if a company's in trouble or a bank is in trouble what we don't want to do is let the customers know. so i find that rather challenging because i think revelation of what is going on, what's going on especially now with the financial crisis what the american people want. i'm also interested in finding out some day which

or you will appeal this -- whether or not you will appeal this case. it was ruled on march 19th. i think the taxpayers would like to know how much does the federal reserve really spend on their legal counsels. i'm sure there's a lot of lawyers and i know you don't have to come to the congress to get an appropriation for this. so i'd like to know how you pay these bills and how much you pay. these are the things that we need to talk about but also in the question-and-answer session i do want to bring up some specifics about the challenges that you have for some day maybe shrinking the balance sheet and i will pursue that in the question-and-answer period. thank you. >> gentleman's time has expired the gentleman from texas mr. hen sling is recognized for a minute and a half. >> thank you mr. chairman. on sunday night the nation's fiscal future went from grim to grimmer if one takes out the bernie madoff accounting gimmicks like the timing

shift the unpaid for doc fix the rate on social security the double accounting for half a trillion of medicare cuts the true cost of the government health care take-over bill is $2.3 trillion or another $20,000 per american family. this son top of the fact that our deficit has increased tenfold in the last two years. the president has submitted a budget that will triple the national debt over the next 10 years a budget even his own omb director says is unsustainable spending percentage of the economy 24 nlt.p% of gdp highest since world war ii caused to say "the outlook for federal budget is bleak, u.s. fiscal policy is on unsustainable path. congressman said about spending patterns itth it could trigger economic and political death spiral unless the congress and president have a sudden epiphany of fiscal sanity this story does not have a

happy ending ends in job crushing family budget crushing tax increases skyrocketing interest rates as we beg the chinese to buy more of our debt. our level of inflation that will make us look longingly and nostalgic upon the carter era. clearly the action of the president and the congress and the blurring of the lines with the federal reserve between fiscal and monetary policy will have much to do with the future and i look forward to the chairman's testimony. >> the gentleman's time has expired the gentleman from new jersey mr. garrett is recognized for one and a half minutes. >> i thank the chairman. today we're going to be discussing the fed's exit strategy from unpress dend propping up of the economy due to financial crisisment bark on february 10th you were here and talked about one of the tools you now have and that's paying interest on reserves that held at the fed. i would think experts seem to tell me that trying to use this and other tools is going to be a real challenge for the fed in order just to

get it all right and that's just not me saying it. renowned fed historian said for instance that he believes that the fed's antiinflationary exit strategy will fail. he asserts that the efforts to reduce inflation back during the 70s failed because as the chairman points out if you do it -- if it ends prematurely and if it ends prematurely because of public pressure press prur sh from the pub and congress and the administration and complain loudly because these things affect the employment rate or the unemployment rate. we're sort of in the same situation today with high, current and perspective unemployment. you may be facing as you realize similar dilemma. so the questions are here you have these political obstacles and i'm wondering if the chairman and others of the fed have concerns about the political ramification if the feds were to say hold reserves on the balance sheet of around a trillion dollars. interest rates go up to say around 5% that you're paying out on those and in effect

the fed will be paying out at that rate $50 billion every year with that balance sheet and interest rates stayed at that level some might say then the fed would be paying $50 billion to banks not to lend. so i'll be curious to see how the fed will be able to deal with that political ramifications. >> gentleman's time has expired. we're pleased today to have again the chairman of the federal reserve. chairman bernanke and we'll recognize the chairman for his statement. >> thank you. chairman frank and ranking members paul and other members of the committee and subcommittee i appreciate the opportunity to discuss the federal vev's exit strategy from the extraordinary lending and monetary policies imit -- it implemented the combat the financial crisis and support economic activity. use know i previously submitted prepared testimony for a hearing on this topic that was canceled because of weather conditions. i request that that testimony be included in the record of this hearing. this morning in lieu of reporting my troef previous

prepared statement i'd like to summarize some key points from earlier testimony and update the committee on recent developments. broadly speaking the federal reserve's response to the crisis and the recession can be divided into two parts. first our financial system during the past two and a half years experienced periods of intense panic and dysfunction during which private short-term funding became difficult or impossible to obtain from any borrowers. the pulling back of private liquidity at times threatened the stability of institutions and market asks and severely disrupted normal channels of credit. in its roll of liquidity provider of last resort the federal reserve developed a number of programs to provide well secured mostly short-term credit to the financial system. these programs which impose no cost on taxpayers were a critical part of the government's efforts to stabilize the financial system and restart the flow of credit to american families and businesses. besides ensuring that a range of financial institutions including

depository institutions and primary dealers and money market mutual funds had access to adequate liquidity in an extremely stressed environment the federal reserve's lending helped restore normal functioning and support credit extension in a number of key financial markets including interbank lending market commercial paper market and market for asset-backed securities. as financial positions have -- condition have improved have substantially phased out these programs. some closed over the course of 2009 and most others expire on february 1st. the term option facility under which fixed amounts of discount window credit option to institutions was discontinue in the past few weeks. as of today the only facility still in operation that offers credit to multiple institutions other than the regular discount window is the term asset-backed securities loan facility or talf which has supported the market for asset-backed securities such as those backed by auto loans, credit card loans small business loans and student loans.

reflecting notably better conditions than many markets for asset-backed securities talf is scheduled to close march 31st for loans backed by all tipts of collateral exsystem up inly issued mortgage back securities or cmb sqshgs june 30th the loans backed by newly issued cmbs. in addition to federal reserve has been normalizeing the terms of regular discount window loans reduced the maximum maturity of window loans from nin 90 days to overnight for nearly all loans restoring the precrisis practice. in mid february the federal reserve also increased the spread between discount rate and upper limit of target range for federal funds rates from 25 basis points to 50 basis points. we have emphasized that both the closure of our emergency lending facilities and the adjustments to the terms of discount window loans are reresponses to improving condition in financial markets. they are not ekt pecked to lead to tighter financial conditions for household and businesses and hence do not

constitute is a tightening of monetary policy nor should they be interpreted as signaling any change in the outlook for monetary policy. the second part of the federal reserve's response for the crisis and recession besides position liquidity to the financial system involves both standard and less con tensional form for monetary policy after reducing short-term interest rates nearly to zero provide additional monetary policy stimulus through large scale purchase of treasury securities agency mortgage backed securities and agency debt. all tolled the federal reserve purchased 300 billion of treasury securities and will conclude purchase of 1.25 trillion dollars of agency mbs and about 175 billion dollars of agency debt at the end of this month. the federal reserve's purchase have had the effect of leaving banking system highly liquid with u.s. banks now holding more than 1.1 trillion dollars of reserves with federal reserve banks. a range of evidence suggests that these purchases and the

associated creation of bank reserves have helped improve conditions in mortgage markets and other private credit markets and put downward pressure on longer term private borrowing rates and spreads. at its meeting last week the fomc maintained target range federal funds rate 0-1-4th percent and continues to anticipate economic conditions including low rates of row source utilization subdued inflation trends and stable inflation expectations are likely to warrant exceptionally low level of the federal funds rate for extended period. in due course however as the expansion matures the federal reserve will need to begin to tighten monetary condition to prevent the development of inflationary pressures. the federal reserve has a number of tools that will enable it to afirm the stance of policy at the appropriate time. most importantly in october 2008 the congress gave the federal reserve statutory authority to pay interest on balances that banks hold at the federal reserve banks. by increaseing the interest

rates on the ban ex reserves the federal reserve will be able to put significant upward pressure on all short-term interest rates as banks will not supply short-term funds to the money markets at rates significantly below what they can earn holding resenks at the federal reserve banks. actual and perspective increases in short-term interest rates will be reflect in turn in higher long-term interest rates and tighter financial conditions more generally. the federal reserve has also been developing a number of additional tools it will be able to use to reduce the large quantity of reserves currently held by the banking system. reduceing the quantity of reserves will lower the next supply of funds to the money markets which will improve the federal reserves control of financial conditions by lead fog a fighter relationship of the interest rate paid on reserves and other short-term interest rates. notably to build the capability to drain large quantities of reserve the federal reserve has been working to ex -- expand range, beyond the primary dealers and develop the

infrastructure necessary to use agency mbs as collateral in such transactions. in this regard the federal reserve recently announced the cry tier yar -- criteria it will be applying in determining must be market mew choul funds to service counter parties and reverse repurchase agreements. as an additional means of draining reserves the federal reserve is also developing plans to offer depository institutions term deposits roughly analogous to certificates of deposits the institutions off tore their own customers a proposal describeing a term deposit facility recently published in the federal register and the federal reserve is finalizing a revised proposal in light of the public comments have been resieved after revised proposal is reviewed by the board expect to be able to conduct test transactions in the spring and have the facility available if necessary thereafter. the use of reverse row poes and the deposit fa lty would together allow the federal reserve to drain hundreds of billions of dollars of resfrevs the banking system quite quickly should out

choose to do so. when these tools are used to drain vevs in the banking system they do so by replacing bank reserves with other liabilities the asset side and the overall size federal reserve balance sheet remain unchanged. if necessary as a means of applying monetary restraint the federal reserve also has the option of redeeming or selling securities. the redemption or sale of securities would have the effect of reduceing the size of the federal reserve's plans sheet as well as further reduceing the quantity of reserves in the banking system. restoring the size and composition of the balance sheet to a more normal configuration is a longer term objective of our policies in any case the sequencing of steps and the combination of tools that the federal reserve uses as it exits from currently very accommodative policy stance will depend on economic and financial development and our best judgments how to meet the federal reserve's dual mandate of maximum employment and price stability. in some in response to severe threats to our

economy the federal reserve create series of special lending facilities to stabilize the financial system and encourage the resumption of private credit flows to american families and businesses. as market conditions in the economic outlook have improved these programs have been terminated or are being phased out. the federal reserve also promote economic recovery through sharp reductions in its target for federal funds rate and large scale purchase of securities. the economy continues to require the support of accommodative monetary policies. however, we have been working too ensure that we have the tools and to reverse at the appropriate time the currently very high degree of monetary stimulus. we have full confidence when the time comes we will be ready to do so. thank you mr. chairman. >> i thank the chairman for his statement and we'll now recognize members for five minutes each. and i'll recognize myself officially for five minutes.

chairman bernanke i guess one thing i usually am pretty aggressive about is the balance between unemployment and inflation or emphasis on unemployment and again seem to be more emphasis in your statement about making sure we counter inflation than on the side -- the employment side. i guess my first question wour -- would be how should the high unemployment rate factor into the fed's timing and sequencing decisions and if you could elaborate on that a little bit more. >> certainly. of course as you know we have a dual mandate from the congress to pursue both maximum employment and price stability and we intend to do that. the two are mutually reinforcing and in particular main taken stable

inflation over the longer term. increases economic growth and improves employment potential in that respect. so it's very important that we pay attention to both sides the dual mandate and we'll do so. currently the employment situation is very weak aus glow the unemployment rate is close to 10% and about 40% of the unemployed have been unemployed for a long tefrment -- term. in response to that the federal reserve has been maintaining ek fromly accommodative policies. we've lowered the interest rate almost to zero. we have increased the size of our balance sheet as i describeed to 2.3 trillion. two and a halftimes what it was before the crisis and so we are producing very substantial support for the economy and as we've indicated in our statements we believe that the overall configuration of resource utilization and inflation will be such that accommodative policy will be

justified for an extended period. so we are certainly not ignoring that side of our mandate. >> i'm sure my ranking member may think i'm throwing you a softball when i ask this question but i seem to detect in your statement a greater emphasis on transparency at the fed particularly on page four where you say the federal reserve recently announced the criteria that it will apply and determine the eligibility of money market mutual funds to serve as counter parties. that's something that you are announcing pretty far out in advance and then a proposal describing a term deposit facility was recently published in the federal register and the federal reserve is finalizing a revised proposal. am i misleading that you all seem to be paying greater emphasis to providing more

transparency to the public and to the people that you deal with about how to fed is going to play this out. >> we've been very much committed to maintaining high transparency. we will continue to explain and communicate as clearly as possible our criteria and how we're going to go forward with withdrawing stimulus and we'll be providing information as we already are for example on the specifics of our asset purchases and what we hold. as i mentioned in my testimony, we are, have just recently fazed out and with the talf in june we will have phased out all of our 13 fa stills that we created to support troubled financial markets and as i mentioned in my humphrey hawkins testimony before this committee, we are open to very full auditing of those facilities by the gao including with appropriate

delay the names of all the firms to which we made loans. so we understand the importance of transparency and i promise you that we will continue to to do that. >> and you've announced closing dates for at least one of the facilities march 31st and june 30. their potential specific impacts that we could see from closing those facilities? could you elaborate on whether there may be specific impacts in doing that. >> mr. chairman, these fa slties were create under the 133 emergency authority because conditions were unusual the mar ketsd were highly disrupted, highly dysfunctional in substantial part because of our intervention those markets are now working quite normally so no longer justification for holding those facility, open. and as i mentioned we had

closed most of them as of february 1est and so far we have seen no adverse circumstances. in the case of the asset-backed securities market which is the one remaining area where we are providing support, while that market is not completely returned to normal we've seen considerable improvement. for example, the spreads between the abs yields and treasury yields have come in considerbly. those markets are now exhibiting issuances without any kind of fed support and so we believe that it's appropriate as those markets are returning to more normal condition we that we withdraw that support. >> thank you my time has expired and i'll recognize the gentleman from alabama. >> thank you. chairman bernanke, i want to acknowledge that you have been talking about transparency for several years and you've been an advocate on the board and i appreciate that and i think there are disfunction -- distinctions to be drawn between transparency when it

comes to 13-3 actions and monetary policy. i think there's a consensus on the 13-3 programs and some of the extraordinary things and i think that we can get there on the monetary policy. as part of your quantitative easing strategy you're going to stop purchasing mortgage back security at the end of this month. does that indicate that you believe maybe that housing has reached a sustainable level? >> well, the housing market congressman as we all know is still quite weak and we've seen some very weak sales numbers the last few days. but we do believe that first of all that the mortgage markets are performing better and mortgage rates are quite low from a historical perspective. and moreover our purchase of mortgage-backed securities were also intended to create better conditions and private credit markets more broadly and we're seeing for

example record issuance in the corporate bond market. so we think our program has been effective. we announced quite a while ago that we were going to stop those purchases, taper off those purchases at the end of this quarter. when we did that we of course were concerned that when bestopped that -- we stopped that mortgage rates might pop back up or we might see some fallback in financial condition. we'll of course continue to watch that situation but so far there seems to be very little negative reaction. which is encouraging and that would allow us to stop our purchases without concerns about the implications for the economy. >> i guess there is some indication you believe we may have reached a sustainable prices in housing at least the short-term prospects for housing is more stable? >> well, many you know, i said in the past knowing the correct value for any asset

is a difficult challenge, but many economists have pointed out that the ratio of house prices to rent for example is very much in a normal range. and between low mortgage rates and the decline in house prices the affordability of housing for people who want to buy homes is now at a very, very good level. >> all right. thank you. i appreciate some of the actions that were taken in the financial markets by the fed will result in an economy that was under extreme stress. i'm not sure the people realize the challenges and they were somewhat unpress dend so i think some of the actions that were taken were because of financial markets were in what i've said was a heart attack or a stroke condition almost. having said that you know, we want to avoid that in the future. and my concern is we're talking about regulation. we're talking about tools to deal with this and i'd like your thoughts on this.

i don't believe that even with all the tools and all the regulations we've put if we don't get our physical house in order the congress you're not going to be successful. i think reigning in the growth of debt is simply going to be impossible for you to do your job if we don't do ours. and i've listed budget reform, entitlement reform. tax reform. do you agree that those, critical for congress to take action and do that now to avoid another catastrophic event whether it's two years, five years or ten years from now? >> well, congressman, you know, we have very high def it iss this year and next year -- deficits this year and next year ask given the severity of the recession it's unlikely we could get a balanced budget in the next year or two and i think we all understand that. m