WASHINGTON - Federal Reserve Chairman Ben Bernanke began Wednesday to outline the central bank's strategy for reeling in stimulus money once the economic recovery is more firmly rooted.
In testimony prepared for the House Financial Services Committee, which postponed the hearing because of a snowstorm, Bernanke said the Fed will likely start to tighten credit by boosting the interest rate it pays banks on money they leave at the central bank. Doing so would raise rates tied to commercial banks' prime rate and affect many consumer loans. Companies and ordinary Americans would pay more to borrow.
But Bernanke repeated the Federal Open Market Committee statement that low rates are warranted "for an extended period" because the recovery still needs support from record-low interest rates.
"Before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate," Bernanke said. The change is "not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy."
Using the rate it pays on banks' excess reserves to affect credit would be a new strategy for the Fed. Since the 1980s, its main lever to tighten or loosen credit has been the federal funds rate, the rate banks charge each other for loans. It's now at a record low near zero.
The rate paid on banks' excess reserves is 0.25 percent. Boosting that would give banks an incentive to keep money parked at the Fed, rather than lend it.