Five Minute Quick Summary:
Bernanke first discusses the past and what the Fed has done as a reaction to the financial crisis. Beginning in 2007, they cut the discount rate and extended term loans to banks. In 2008 and early 2009, Federal funds rate targets were reduced in an effort to help stimulate the economy. In addition, the Feds led bank stress tests. As we all know, from late 2008 to mid-2011, purchases of mortgage back securities were made by the government in hopes of raising the price of those securities.Bernanke then goes on to speak on the benefits of purchasing longer-term securities, which include lower long-term interest rates and thereby increasing business confidence. The Fed announced that it would “trade” in $400B shorter-term Treasury securities for long-term securities over a period ending June 2012. In other words, they sold shorter-term Treasury securities and purchased long-term securities. This program has been extended to the end of this year. These balance sheet policies have both lowered discount rates and improved economic outlook. Stock prices increased and this is important as it affects both consumption and investment decisions.The Chairman discusses clear communication with the public. He noted that the Committee further affirmed that federal rates will remain low until at least late 2014.While there are benefits with LSAPs or large scale asset purchases, the government understands that if the Feds become too big of a buyer, private agents could “dry up”. Thereby degrading liquidity and hurt the public’s confidence in the Fed’s ability to exit these securities. Like with all investments there is a chance that there may be a loss incurred when the Feds liquidate. However, the Chairman has suggested that the analysis says they would be able to make money for the public.The Fed expected that the economy would be a lot better than it is now. It has been held back due to the housing market’s slow recovery, fiscal policy, and stresses on financial and credit markets largely due to the uncertainty surrounding the European economies.
When significant financial stresses first emerged, in August 2007, the FOMC responded quickly, first through liquidity actions--cutting the discount rate and extending term loans to banks--and then, in September, by lowering the target for the federal funds rate by 50 basis points. As further indications of economic weakness appeared over subsequent months, the Committee reduced its target for the federal funds rate by a cumulative 325 basis points, leaving the target at 2 percent by the spring of 2008.