Recovery of stimulus money eyed

WASHINGTON - Federal Reserve Chairman Ben S. Bernanke began yesterday to outline the central bank's strategy for reeling in stimulus money once the economic recovery is more firmly rooted.

Bernanke said the Fed would likely start to tighten credit by boosting the interest rate it pays banks on money they leave at the central bank. That would raise rates tied to commercial banks' prime rate and affect many consumer loans. Companies and ordinary Americans would pay more to borrow.

But, in prepared remarks to a House committee, Bernanke indicated the Fed was still months from raising rates or draining most of the stimulus money it injected to rescue the financial system. He said the recovery still needed support from record-low interest rates.

The Fed chief used his remarks to explain how the central bank would try to withdraw the stimulus money without tipping the economy back into recession.

Using the rate it pays on banks' excess reserves to affect credit would be a new strategy for the Fed. Since the 1980s, its main lever to tighten or loosen credit has been the federal funds rate. That rate is 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 lending it.

It also would cause the funds rate to rise, economists say. Adjusting the interest paid on banks' excess reserves helps stabilize the funds rate when the financial system is awash in cash, as it is now.

In prepared remarks to the House Financial Services Committee, Bernanke laid out his most extensive details to date on the Fed's exit strategy from low rates and economic stimulus. Because of the threat of a major snowstorm, the panel postponed its hearing, which had been scheduled for yesterday.