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By Michael S. Derby
    A Dow Jones Column

NEW YORK (Dow Jones)–Congressional testimony by Federal Reserve Chairman Ben Bernanke Wednesday flagged a potentially seismic shift in how the central bank communicates its objectives to financial markets.

He said odds are high that when policy makers decide to lift short-term interest rates, they will target something other than the fed funds rate, for decades the primary focus of central bank policy. “It is possible that the Federal Reserve could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities, as a guide to its policy stance, while simultaneously monitoring a range of market rates,” he said in written testimony to the House Financial Services Committee, adding “no decision has been made on this issue.” Continue reading…

By Michael Casey
    A DOW JONES NEWSWIRES COLUMN

NEW YORK (Dow Jones)–The Federal Reserve, aka America’s home lender, faces a tough decision in the spring.

Does it do as promised and end its program of mortgage-backed securities purchases once it reaches its $1.25 trillion target at the end of March? Or does it extend this vital support for a critically important sector?

Until Tuesday, the first option seemed a shoo-in. Last week’s drop of 22,000 in initial jobless claims and Monday’s news of a bigger-than-expected expansion in manufacturing confirmed that a recovery is under way, offering the Fed an excuse to begin to unwind its extraordinary monetary stimulus. Ending its mortgage purchase program would be a key step in that “exit strategy.”

It would also be in line with previous commitments: On Dec. 16, the Fed’s Open Market Committee reiterated that it “anticipates” all such transactions “will be executed by the end of the first quarter of 2010.”

“I think they are going to do as they say,” said Mark Zandi, chief economist at Moody’s Economy.com. “I think they desperately want to get out of the business of being the main mortgage lender in the country.” Continue reading…

By Michael S. Derby 
A DOW JONES NEWSWIRES COLUMN 
 
NEW YORK (Dow Jones)–It’s a sign of the times that one of the primary focuses of Ben Bernanke’s trip to Congress is not so much economics, but his defense of central bank independence.

In the first of two days of testimony Tuesday, the Federal Reserve chairman spent much of his time reiterating to members of the House Financial Services Committee what they already knew: the Fed’s expectation of a modest recovery forming this year, in an environment with low inflation and what’s likely to be steady monetary policy. Even the exit strategy talk that was ostensibly at the heart of Bernanke’s testimony has already been laid out in a Wall Street Journal Op-Ed piece.

The real story was the quickening battle over how much control Congress will have over the Fed and its ability to set monetary policy. The main threat, as seen by central bankers, is an increasingly popular bill subjecting Fed interest rate decisions to Government Accountability Office oversight.

Continue reading…