WASHINGTON — Federal Reserve Chairman Ben Bernanke faced lawmakers for the second day Thursday, continuing to take a cautious tone in his update on the economic outlook.
Bernanke said Thursday that he hopes over time to reduce the Fed’s balance sheet to a more normal size. Testifying before the Senate Banking Committee, Bernanke said his goal is to eventually shrink the size of the Fed’s holdings and shift their composition so that the central bank would only hold Treasurys.
As part of its efforts to keep interest rates low and spur economic growth, the Fed has more than doubled the size of its balance sheet since the financial crisis after embarking on two rounds of bond-buying and purchasing mortgage-backed securities in an effort to support the weak housing market. The Fed’s asset holdings were $2.935 trillion in the week ended Feb. 22.
Bernanke defended the central bank’s expectations to keep short-term interest rates near zero until late 2014, saying that the benefits of low interest rates to spur spending and investment right now outweigh any potential impact they could be having on the recent rise in commodity prices.
Low interest rates could nudge up oil prices if they help the economy grow, but that’s a benefit that would outweigh the cost, Bernanke said in response to Sen. David Vitter’s (R-La.) concerns over the rise in gasoline prices.
The dollar has also remained “pretty stable,” at the same time the Fed has kept its easy-money policy, Bernanke noted. However, sharp increases in prices caused by geopolitical events, such as concerns over whether conflict with Iran could disrupt oil supply, are “unambiguously negative,” he said.
The central banker did note that banks should be preparing to make sure they don’t lose money on bonds when the Fed eventually decides to raise interest rates.
“Our current expectation is the short term rate will stay low for a good bit more time. Eventually the economy will strengthen, inflation will begin to rise and the Fed will have to raise short-term interest rates,” Bernanke said, calling that “a good, healthy thing,” but cautioning that the Fed wants “to make sure banks understand their risks and they are well protected and hedged against whatever course interest rates might take.”