Bernanke Muses The Withdrawal Of US Bank Stimulus Package

Newly re-elected for his second term as Chairman of the US Federal Reserve, Ben Bernanke has started to draw up an exit strategy from the stimulus package that was put together at the height of the financial crisis to avoid meltdown of the financial system. In essence, the package was designed to enhance liquidity within the US financial system at a time when jitters over the sub-prime fiasco had all but dried up the money supply.

Bernanke was due to speak to a hearing of the House of Representatives Financial Services Committee, but the meeting was postponed because of heavy snowfall. However, some of his preparatory remarks were made available: "Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions,"

Bernanke stressed that the putative American recovery was not yet strong enough to withstand the withdrawal of the supportive measures, but at some stage, the $1tn stimulus measures would need to be absorbed back into the Reserve. Analysts believe that should the funding remain in the economy once the recovery takes hold it would likely trigger inflation.

This can be achieved in a number of ways, one of which is to pay more interest on the reserves that banks have on deposit at the Federal Reserve which would encourage them to place more money with the Reserve, taking it out of the economy.

Other relatively painless measures would include tightening the array of emergency loan measures, making them more expensive and shorter duration. Clearly timing will be everything in this juggling act.