ben s bernanke : federal reserve programs to strengthen credit markets and the economy testimony by mr ben s bernanke, chairman of the board of governors of the us federal reserve system, before the committee on financial services, us house of representatives, washington, dc, 10 february 2009. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * chairman frank, ranking member bachus, and other members of the committee, i appreciate this opportunity to provide a brief review of the federal reserve's various credit programs, including those relying on our emergency authorities under section 13 ( 3 ) of the federal reserve act. i will also discuss the federal reserve's ongoing efforts to inform the congress and the public about these activities. federal reserve programs to strengthen credit markets and the economy as you know, the past 18 months or so have been extraordinarily challenging for policymakers around the globe, not least for central banks. the federal reserve has responded forcefully to the financial and economic crisis since its emergence in the summer of 2007. monetary policy has been especially proactive. the federal open market committee ( fomc ) began to ease monetary policy in september 2007 and continued to ease in response to a weakening economic outlook. in december 2008, the committee set a range of 0 to 25 basis points for the target federal funds rate. although the target for the federal funds rate is at its effective floor, the federal reserve has employed at least three types of additional tools to improve the functioning of credit markets, ease financial conditions, and support economic activity. the first set of tools is closely tied to the central bank's traditional role of providing short - term liquidity to sound financial institutions. over the course of the crisis, the fed has taken a number of extraordinary actions, including the creation of a number of new facilities for auctioning short - term credit, to ensure that financial institutions have adequate access to liquidity. in fulfilling its traditional lending function, the federal reserve enhances the stability of our financial system, increases the willingness of financial institutions to extend credit, and helps to ease conditions in interbank lending markets, reducing the overall cost of capital to banks. in addition, some interest rates, including the rates on some adjustable - rate mortgages, are tied contractually to key interbank rates, such as the london interbank offered rate ( libor ). to the extent that the provision of ample liquidity

. once the financial environment changes, it is possible that people will pay attention to the relationship between the government and the central bank. expectations for the central bank ’ s operation to support bond prices might rise. however, under free capital mobility, the central bank ’ s involvement will not solve the problem. to be concrete, even though the central bank increases its operation in the government bond market in order to suppress the government ’ s borrowing costs, the premiums might possibly rise according to the mechanism that i laid out today, when it is judged by market participants that the central bank ’ s operation will weaken fiscal discipline. furthermore, if the market thinks that the rapid increase in the central bank ’ s balance sheet might cause inflation beyond the level judged appropriate, then the anticipated future short - term interest rates might rise. in short, it is the market judgment that matters rather than the central bank ’ s intention. down the road, social security spending is expected to rise due to the aging. that spending in japan is not significantly high relative to that in other economies at this moment. however, it is vital that the government makes seamless and tireless efforts to make sure that fiscal discipline remains firmly intact and there is no doubt in the market concerning the government ’ s intention toward fiscal discipline ( chart 9 ). f. plausibility of financial repression despite the government ’ s determination to achieve fiscal consolidation, it appears that there is still a view stating that the central bank should conduct monetary policy in consideration of the fiscal situation. those who are obsessed with such a view claim that the central bank should continue its massive bond purchase operations in order to avoid the problem of fiscal concern. they insist that the central bank should be involved in such operations when long - term rates start to pick up around the time of an exit. often referred to as “ financial repression ”, the intention here is to contain a possible pick - up in nominal rates through the central bank ’ s massive bond purchases in order to maintain fiscal sustainability. that reminds me of the “ fiscal theory of price level ( ftpl ) ”. 3 the ftpl states that a fiscal stimulus is effective for price stability. however, it is implicitly based on the assumption that a central bank does financial repression. in other words, it supposes that the bond prices will be maintained despite an increase in government debts as a result of fiscal expansion. otherwise, the private sector, which holds government bonds, will reduce its spending due to the adverse wealth effect and