ben s bernanke : federal reserve ’ s exit strategy testimony by mr ben s bernanke, chairman of the board of governors of the federal reserve system, before the committee on financial services, us house of representatives, washington dc, 10 february 2010. statement as prepared for delivery. the hearing was postponed due to inclement weather. * * * chairmen frank and watt, ranking members bachus and paul, and other members of the committee and subcommittee, i appreciate the opportunity to discuss the federal reserve ’ s strategy for exiting from the extraordinary lending and monetary policies that it implemented to combat the financial crisis and support economic activity. 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 2 – 1 / 2 years has experienced periods of intense panic and dysfunction, during which private short - term funding became difficult or impossible to obtain for many borrowers. the pulling back of private liquidity at times threatened the stability of major financial institutions and markets and severely disrupted normal channels of credit. in its role as liquidity provider of last resort, the federal reserve developed a number of programs to provide well - secured, mostly shortterm credit to the financial system. these programs, which imposed no cost on the taxpayer, were a critical part of the government ’ s efforts to stabilize the financial system and restart the flow of credit. 1 as financial conditions have improved, the federal reserve has substantially phased out these lending programs. second, after reducing short - term interest rates nearly to zero, the federal open market committee ( fomc ) provided additional monetary policy stimulus through large - scale purchases of treasury and agency securities. these asset purchases, which had the additional effect of substantially increasing the reserves that depository institutions hold with the federal reserve banks, have helped lower interest rates and spreads in the mortgage market and other key credit markets, thereby promoting economic growth. although at present the u. s. economy continues to require the support of highly accommodative monetary policies, at some point the federal reserve will need to tighten financial conditions by raising short - term interest rates and reducing the quantity of bank reserves outstanding. we have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively. liquidity programs with the onset of the crisis in the late summer and fall of 2007, the federal reserve aimed to

these exposures to decline gradually over time. the board continues to anticipate that the federal reserve will ultimately incur no loss on these loans as well. these loans were made with great reluctance under extreme conditions and in the absence of an appropriate alternative legal framework. to preclude any future need for the federal reserve to lend in similar circumstances, we strongly support the establishment of a statutory regime for the safe resolution of failing, systemically important nonbank financial institutions. monetary policy and asset purchases in addition to supporting the functioning of financial markets, the federal reserve also applied an extraordinary degree of monetary policy stimulus to help counter the adverse effects of the financial crisis on the economy. in september 2007, the federal reserve began reducing its target for the federal funds rate from an initial level of 5 – 1 / 4 percent. by late 2008, this target reached a range of 0 to 1 / 4 percent, essentially the lowest feasible level. with its conventional policy arsenal exhausted and the economy remaining under the talf extends three - and five - year loans, which will remain outstanding after the facility closes for new loans. the extension of the cmbs portion of the facility reflects the board ’ s assessment that conditions in that sector remain highly stressed, as well as the fact that cmbs securitizations are more complex and take longer to arrange than other types. severe stress, the federal reserve decided to provide additional stimulus through largescale purchases of federal agency debt and mortgage - backed securities ( mbs ) that are fully guaranteed by federal agencies. in march 2009, the federal reserve expanded its purchases of agency securities and began to purchase longer - term treasury securities as well. all told, the federal reserve purchased $ 300 billion of treasury securities and currently anticipates concluding purchases of $ 1. 25 trillion of agency mbs and about $ 175 billion of agency debt securities at the end of march. the federal reserve ’ s purchases have had the effect of leaving the banking system in a highly liquid condition, with u. s. banks now holding more than $ 1. 1 trillion 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 private credit markets and put downward pressure on longer - term private borrowing rates and spreads. the fomc anticipates that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for