Today's hearing is another in a series of steps in Congress' ongoing
effort to examine the consequences of the global economic crisis. Today,
we focus on how the Federal Reserve must now unwind its responses to the
domestic part of the crisis in ways that minimize the future impacts of the
responses so they don't have a deleterious impact on our economy.
In response to the global economic crisis, the Federal Reserve injected
over $2 trillion into the economy through various liquidity initiatives,
including the Term-Asset Backed Securities Loan Facility (TALF), the
Commercial Paper Funding Facility and the Fed's commitment to purchase
about $1.25 trillion of mortgage-backed securities. The immediate result of
the Fed's actions was to expand its balance sheet dramatically and to put an
unprecedented volume of reserves into the banking system. These steps
were designed to unfreeze the domestic credit markets. Many economists
and commentators credit the decisive steps taken by the Fed with saving the
U.S. economy from collapse and staving off an economic downturn that
might have equaled or exceeded the Great Depression.
The central issue of today's hearing is how the Fed will decide the
proper timing and sequencing of unwinding these emergency liquidity
programs. The Fed must withdraw this liquidity while keeping inflation in
check and encouraging job growth, all without hurting the fragile economic
recovery that is underway. Every analysis I have seen has suggested that
this will be a delicate balancing act that will have to be done just right to
avoid significant damage to the economy. If recent history is any guide, the
decisions the Fed makes to carry out this delicate balancing act, regardless of
what these decisions are, will be second-guessed by the Congress and the
public and this could call into question the independence of the Fed.
I am hopeful that we can use this hearing to understand better the
policy options available to the Fed to unwind these programs and the
potential policy implications of the various options. At the same time, I
think we should be careful not to infringe on the Fed's ability and
willingness to exercise its independent judgment about which options will be
the most desirable and effective. So I view this hearing as an effort to
educate members of our Committee, not as a forum for us to try to intimidate
or browbeat the Fed into pursuing specific options.
We have asked the witnesses to provide information about specific
monetary policy tools and options that are available to the Fed, including
paying interest on reserves, entering reverse repurchase agreements, utilizing
the recently introduced Term Deposit facility, conducting direct asset sales
of the mortgage-backed securities it has purchased and any other options that
might be appropriate. We need to understand the projected advantages and
disadvantages of each option so we'll understand better what the Fed is
doing when it uses particular options and, perhaps, even be in a position to
explain to our constituents why particular steps are being taken.
Some economists have called into question whether traditional
monetary policy tools, like lower interest rates, can work. They say that the
U.S. could be in a "Balance-Sheet Recession" that occurs when private
businesses are so focused on repairing their balance sheets after an asset-
price bubble burst that the economy does not respond to normal monetary
policy tools. They caution against cutting off emergency economic
measures too soon, the mistake made by policymakers in Japan that resulted
in a decade-long economic stagnation.
I especially look forward to Chairman Bernanke telling us how the
Fed can effectively unwind its emergency liquidity programs while reducing
inflationary fears, encouraging job growth and maintaining the fragile
economic recovery, knowing full well that we all expect him to be a Master
Conductor who will "wave the magic wand" that will lead our economy to
play sweet music again.