Will Government's Massaging of the Yield Curve Change Credit Behavior; Many Wouldn't Loan Money even at 0% Today; a Conundrum Unfolding?

WASHINGTON (Dow Jones)--U.S. Federal Reserve Chairman Ben Bernanke said Friday that the central bank's stepped-up purchase programs for Treasury and mortgage-related securities have been successful in lowering key borrowing costs for households and companies. He also signaled that the Fed is keeping a close eye on the size of reserve balances held at the Fed by commercial banks, saying that if those balances aren't managed right, they could make it tougher for the Fed to eventually tighten policy. The Fed's programs to purchase up to $300 billion in longer-term Treasury securities and a combined $1.45 trillion in agency and agency-backed mortgage-backed securities "are having the intended effect," Bernanke said in prepared remarks to a Federal Reserve Bank of Richmond conference. Mortgage rates, which Bernanke said didn't respond much to the Fed's interest rate cuts, have declined between one and 1.5 percentage points since the MBS purchase plan was first announced last November, he said. "Over time, lower mortgage rates should help to improve conditions in the housing market, whose persistent weakness has had a major impact on economic and financial conditions more broadly, and will improve the financial condition of some households by facilitating refinancing," Bernanke said. Bernanke's speech didn't address the economy, other than to say that he has "great confidence" in its underlying strength. The speech was instead a detailed description of the Fed's balance sheet, which has ballooned since last September in the wake of the collapse of Lehman Brothers from less than $1 trillion to over $2 trillion. It'll likely get much bigger once the Fed's Treasury and MBS programs are fully implemented. "The Fed's holdings of high-quality securities are set to grow considerably," Bernanke said. In breaking down the Fed's balance sheet, Bernanke stressed that much of it is in short-term, high-quality assets. Only about 5% of it is comprised of loans to Bear Stearns and AIG, which carry more risk than other parts of the balance sheet. "We nevertheless expect to be fully repaid," Bernanke said. Bernanke said the eligible collateral for the Fed's $1 trillion Term Asset-Backed Securities Loan Facility, or TALF, will likely expand to include commercial mortgages and securities that aren't newly issued. -By Brian Blackstone, Dow Jones Newswires; 202-838-3397; brian.blackstone@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=FElxo93nZVQ3drRGe5brJQ%3D%3D. You can use this link on the day this article is published and the following day. (END) Dow Jones Newswires April 03, 2009 12:00 ET (16:00 GMT) Copyright (c) 2009 Dow Jones & Company, Inc.- - 12 00 PM EDT 04-03-09