Updated from 12:21 p.m. EDTCHARLOTTE, N.C. -- Once the financial crisis ends, the Federal Reserve has the tools it needs to tamp down inflation, Chairman Ben Bernanke said Friday at a credit market symposium. "We have a number of tools we can use to reduce bank reserves or increase short-term interest rates when that becomes necessary," he said. The Fed's outstanding balance has increased substantially, which "could complicate the Fed's task of raising short-term interest rates when the economy begins to recover or if inflation expectations were to begin to move higher," he acknowledged. Among the tools: short-term credit extended by the Fed could be wound down relatively quickly. Borrower demand for Fed credit facilities should wane, given their relatively high lending rates. The Fed can sell securities. It can also pay interest on the reserve balances of depository institutions, encouraging them to hold reserves with the Fed rather than lend into the federal funds market at a lower rate. Recently, the Fed has been forced to use its balance sheet as a tool to combat the financial crisis, Bernanke said. "We no longer live in a world in which central bank policies are confined to adjusting the short-term interest rate," he said. "Instead, by using their balance sheets, the Fed and other central banks are developing new tools to ease financial conditions and support economic growth." One result of that, said Bernanke, is that the Fed balance sheet has more than doubled from roughly $870 billion before the past year's economic crisis to roughly $2 trillion now.
Bernanke said that TALF was launched due to the recent rise of securitization markets as an important source of credit to the economy. "A few decades ago, securitization markets barely existed," he said. The size of programs like TALF that lend to credit market participants, currently about $255 million, is expected to grow in the months ahead. So are programs that purchase high quality assets: over the next six months, the Fed will purchase up to $1.25 trillion of agency mortgage-backed securities, up to $200 billion of agency debt, and up to $300 billion of longer-term Treasury securities, Bernanke said. Wesley Sturges, president of Charlotte-based Bank of Commerce, said Bernanke's speech "was more positive than I expected it to be." "He showed that there really is a plan in place," Sturges said. "There has been an alphabet soup, (but) all the components that have been announced willy-nilly came together as a concrete plan." Charlotte is home to Bank of America ( BAC) and Wachovia Bank, which has been taken over by Wells Fargo ( WFC).