House Panel to Examine Fed Exit Strategy, Recovery Plan

Hot on the heels of an acrimonious Senate vote over reconfirming Fed chief Ben Bernanke for a second term, a House committee will take up the hot-button issue of how the central bank intends to handle the transition from economic crisis to recovery at a public hearing next week.


The House Financial Services Committee has scheduled a hearing for Feb. 10, called "Unwinding Emergency Federal Reserve Liquidity Programs and Implications for Economic Recovery".

At this point, it is unclear if Bernanke will testify, according to a senior congressional staffer familiar with the matter. Expert witness lists for hearings are generally not available until two days before the event. The HFS Web site only mentions the event.

Displeasure with Bernanke's handling of the crisis as well as his controversial use of the Fed's emergency powers is likely to bleed into the meeting over the central bank's exit policy, regardless of whether he testifies. House Financial Committee chairman Rep. Barney Frank (D-Mass), however, is a strong supporter of the Fed chairman.

Bernanke is due to make his twice-annual testimony on the state of the economy to both houses of Congress later this month.

Congress has already shown that is clearly concerned about the strength of the economy's recovery, particularly in the area of job creation. That issue is bound to flare brightly again on Friday, when the government reports nonfarm payroll data for January, a number that is expected to show a tiny decrease in employment.

Democrats in Congress and the Obama administration are recommending a number of new initiatives to spur lending and business expansion, despite signs that the recovery is picking up steam. Economic growth was more than 6 percent in the final quarter of 2009, following a flat showing in the third quarter.

Most economists do not expect the Fed to raise interest rates until a jobs recovery seems clearly in place (the consensus is late summer, early fall), but it is already taking steps to end or remove many of the extraordinary monetary policy measures it used to add liquidity in the past year and a half.

The timing of the Fed's exit is considered critical; if undertaken too soon, the economy might falter; if done too late, it could trigger a nasty bout of inflation in the coming years.

In the most recent FOMC meeting, which coincided with the Senate vote on Bernanke's reconfirmation, Fed policy makers stuck to their positions laid out at the previous meeting in December.

Most importantly, they intend to close by the end of February a number of lending facilities, such as one created for the commercial paper market after the collapse of Lehman Brothers in September 2008, and cease buying billions of dollars of mortgage-backed securities and other government-agency bonds by the end of the first quarter.

What the Fed has done in this area has become a matter of great discussion among Wall Street economists, policy analysts and members of Congress, some of whom have been critical of Bernanke's handling of the financial crisis.

That wave of discontent broke loudly a week ago as the Senate faced a deadline on voting on Bernanke's second term. Bernanke was ultimately approved by a roughly 4-to-1 margin, but it was the closest vote for a Fed leader in modern history.