Well done Mr. Bernanke.
Mission accomplished - you brought congressional members up-to-speed on current monetary policy, you adequately answered questions regarding the mechanisms available to recover the enormous amount of stimulus that has been injected into the economy without spawning massive amounts of inflation, and you withstood the badgering of a few less-than-informed legislative hacks. Had you failed to complete your tasks today so masterfully - the credit markets would now likely be engaged in a full-out, fear-driven rout.
It was almost possible to hear the collective sigh-of-relief from mortgage investors as Chairman Bernanke told members of the House Financial Services Committee that the weak economy will warrant exceptionally easy monetary policy (low interest rates) "for an extended period of time." There was nothing in Mr. Bernanke's prepared text testimony -- or in his responses during the question-and-answer session that followed his formal comments -- that caused investors to believe the central bank was anxious to remove excess stimulus from the system.
Credit market participants in general, and mortgage investors specifically, were soothed by the Fed Chairman's statement that assets on the Fed's balance sheet "may remain very large for some time" - an indication the Fed has no immediate plans to begin off-loading their massive mortgage-backed security position. Some analysts are still suggesting the Fed will ultimately announce their intention to hold their entire $1.2+ trillion residential mortgage portfolio to maturity - but I strongly suspect that will prove to be little more than an exercise in wishful thinking. At some point in the future the Fed will almost certainly become a major seller of mortgage-backed securities as they methodically begin to unwind the various elements of their "quantitative easing" programs - but that event is unlikely to take form this year.
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