Fed may hold rates to soak up cash, tackle job losses

WASHINGTON: To keep interest rates at a record low, Ben S Bernanke may have to show Congress and investors he can be as creative about soaking up cash from the financial system as he was when pouring it in. The federal reserve chairman will probably outline his strategy for exiting the biggest monetary expansion in history when he delivers his semiannual economic report to Congress on Tuesday. Among the options: establishing term deposits at the Fed designed to induce banks to keep money there rather than lending it out, said Lou Crandall, chief economist at Wrightson ICAP.

Laying out a plan now may give Bernanke leeway to hold down borrowing costs for as long as it takes to reduce unemployment from a quarter-century high. To do that, he first has to convince lawmakers and investors he���s ready and able to contain inflation as the economy recovers.

���Bernanke needs to explain that the Fed has the tools to do the job and that it intends to use them forcefully when it has to,��� said Lyle Gramley, senior economic adviser with New York-based Soleil Securities and a former central bank governor.

House financial services committee chairman Barney Frank said he expects Bernanke to spell out how the Fed will end its unprecedented expansion of credit when he testifies before the Massachusetts Democrat���s panel on Tuesday. Trading in federal-funds futures suggests a better-than-even chance the central bank will raise its short-term interest-rate target by January from the current range of zero to 0.25%. Laurence Meyer, another former Fed governor, said policy makers will need to keep rates unchanged a lot longer, perhaps until late 2011, to bring down unemployment.