ecb's deposit rate. the bank of japan, the bank of canada, and several other foreign central banks have also used their ability to pay interest on reserves to maintain a floor under short - term market rates. although, in principle, the ability to pay interest on reserves should be sufficient to allow the federal reserve to raise interest rates and control money growth, this approach is likely to be more effective if combined with steps to reduce excess reserves. i will mention three options for achieving such an outcome. first, the federal reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large - scale reverse repurchase agreements ( reverse repos ) with financial market participants, including banks, the gses, and other institutions. reverse repos, which are a traditional and well - understood tool of monetary policy implementation, involve the sale by the federal reserve of securities from its portfolio with an agreement to buy the securities back at a slightly higher price at a later date. reverse repos drain reserves as purchasers transfer cash from banks to the fed. second, using the authority the congress gave us to pay interest on banks'balances at the federal reserve, we can offer term deposits to banks, roughly analogous to the certificates of deposit that banks offer to their customers. bank funds held in term deposits at the federal reserve would not be available to be supplied to the federal funds market. third, the federal reserve could reduce reserves by selling a portion of its holdings of long - term securities in the open market. each of these policy options would help to raise short - term interest rates and limit the growth of broad measures of money and credit, thereby tightening monetary policy. overall, the federal reserve has a wide range of tools for tightening monetary policy when the economic outlook requires us to do so. we will calibrate the timing and pace of any future tightening, together with the mix of tools, to best foster our dual objectives of maximum employment and price stability. conclusion by using our balance sheet, the federal reserve has been able to overcome, at least partially, the constraints on policy posed by dysfunctional credit markets and by the zero lower bound on the federal funds rate target. by improving credit market functioning and adding liquidity to the system, our programs have provided critical support to the financial system and the economy. moreover, we have carried out these programs responsibly, with minimal credit risk and with close attention to the exit strategy. our activities have resulted in substantial changes to

ben s bernanke : federal reserve board's semiannual monetary policy report to the congress testimony by mr ben s bernanke, chairman of the board of governors of the us federal reserve system, before the committee on banking, housing, and urban affairs, us senate, washington, 14 february 2007. * * * chairman dodd, senator shelby, and other members of the committee, i am pleased to present the federal reserve's monetary policy report to the congress. real activity in the united states expanded at a solid pace in 2006, although the pattern of growth was uneven. after a first - quarter rebound from weakness associated with the effects of the hurricanes that ravaged the gulf coast the previous summer, output growth moderated somewhat on average over the remainder of 2006. real gross domestic product ( gdp ) is currently estimated to have increased at an annual rate of about 2 - 3 / 4 percent in the second half of the year. as we anticipated in our july report, the u. s. economy appears to be making a transition from the rapid rate of expansion experienced over the preceding several years to a more sustainable average pace of growth. the principal source of the ongoing moderation has been a substantial cooling in the housing market, which has led to a marked slowdown in the pace of residential construction. however, the weakness in housing market activity and the slower appreciation of house prices do not seem to have spilled over to any significant extent to other sectors of the economy. consumer spending has continued to expand at a solid rate, and the demand for labor has remained strong. on average, about 165, 000 jobs per month have been added to nonfarm payrolls over the past six months, and the unemployment rate, at 4. 6 percent in january, remains low. inflation pressures appear to have abated somewhat following a run - up during the first half of 2006. overall inflation has fallen, in large part as a result of declines in the price of crude oil. readings on core inflation – that is, inflation excluding the prices of food and energy – have improved modestly in recent months. nevertheless, the core inflation rate remains somewhat elevated. in the five policy meetings since the july report, the federal open market committee ( fomc ) has maintained the federal funds rate at 5 - 1 / 4 percent. so far, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing of core inflation. however, in