By Neil Irwin
Washington Post Staff Writer
Friday, March 26, 2010; A18
The Federal Reserve is open to selling some of the securities now on its books as part of its withdrawal from its unconventional efforts to prop up the economy, Chairman Ben S. Bernanke said Thursday, in a change of tone on how the Fed will execute its exit strategy from crisis-era interventions.
Over the past 15 months, with the Fed's short-term interest rate target near zero and the economy in horrible shape, the central bank bought more than $1.7 trillion in long-term assets to push rates down further. The purchases of those assets -- including mortgage-backed securities, debt in companies like Fannie Mae and Freddie Mac, and long-term Treasury bonds -- helped swell the Fed's balance sheet from about $800 billion before the crisis to $2.3 trillion last week.
Bernanke, testifying Thursday before the House Financial Services Committee, said that "if necessary," the Fed "has the option of redeeming or selling securities" bought during the crisis. In written testimony to the same committee on Feb. 10, he was more ambiguous, stating that he did not "anticipate that the Federal Reserve will sell any of its security holdings in the near term," at least until after the Fed had begun raising interest rates and the economy had clearly begun a sustainable recovery.
Similarly, Bernanke said Thursday that "restoring the size and composition of the balance sheet to a more normal configuration is a longer-term objective of our policies." Six weeks earlier, he said only that the Fed "may also choose to sell securities in the future when the economic recovery is sufficiently advanced."
Some members of the Fed's policymaking group, the Federal Open Market Committee, have been pushing to sell off the assets relatively quickly, both to prevent a burst of inflation down the road and to avoid a situation in which the Fed is essentially subsidizing one type of borrowing -- home mortgages -- but not others.
"We can always sell assets," Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said in an interview last week. "I think we need to be open to that. In the long run, the Fed needs to get back to a balance sheet . . . that looks like all Treasurys, and is at a much smaller level. . . . Ultimately we have to shrink the balance sheet."
But Bernanke and other policymakers have been reluctant to sell assets, for fear that doing so would drive up long-term interest rates, stifling economic recovery.
In his testimony, Bernanke continued to make clear that no sales of assets are imminent. Nonetheless, since February, economic data have been generally solid, suggesting that the recovery is on track. Just Thursday, the Labor Department said that there were 442,000 new claims for unemployment insurance benefits last week, down 14,000 from the previous week. And forecasters expect healthy job growth to be reported for March.
Also, the Fed's program to buy $1.25 trillion in mortgage-backed securities is now coming to an end -- it expires March 31. The end of that program has occurred without any rise in mortgage rates, suggesting that the securities markets are now functioning well. That has helped instill confidence that the mortgage market could remain stable even if the Fed were to start selling the securities down the road.