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Fed chief: Rates to stay low awhile

Federal Reserve Chairman Ben Bernanke said Wednesday that the Fed will likely start tightening credit by boosting the interest rate it pays banks on money they leave at the central bank.

Associated Press (2009)

Federal Reserve Chairman Ben Bernanke said Wednesday that the Fed will likely start tightening credit by boosting the interest rate it pays banks on money they leave at the central bank.

WASHINGTON — Prepare for the end of record-low interest rates, Federal Reserve Chairman Ben Bernanke says. Just not yet.

Higher rates on credit cards, home equity loans and some mortgages will follow the Fed's eventual pullback of the trillions it injected into the economy. Savers will benefit, though. As rates gradually climb, certificates of deposit and savings accounts will finally pay more.

Bernanke indicated Wednesday that the Fed is still months away from raising rates or draining most of the stimulus money it injected to rescue the financial system.

Bernanke discussed the Fed's plans in prepared remarks to a House committee hearing that was postponed because of the East Coast snowstorm. Bernanke chose to release the testimony because of interest from investors and others.

Bernanke said the central bank will likely start to tighten credit by boosting the 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.

The stock market initially sank, then steadied itself after hearing Bernanke's plans. The Dow Jones industrial average closed with a modest loss of 20 points.

Using the rate it pays on banks' excess reserves to tighten credit would be a new strategy for the Fed. Since the 1980s, its main lever to adjust credit has been the federal funds rate that 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 rate would give banks an incentive to keep money parked at the Fed, rather than lend it.

Fed chief: Rates to stay low awhile 02/10/10 [Last modified: Wednesday, February 10, 2010 11:21pm]

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