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WASHINGTON (AP) — Federal Reserve Chairman Ben Bernanke began Wednesday to outline the central bank's strategy for reeling in stimulus money once the economic recovery is more firmly rooted.
Bernanke said the Fed will likely start to tighten credit by boosting the interest rate it pays banks on money they leave at the central bank. Doing so 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 is still months away from raising rates or draining most of the stimulus money it injected to rescue the financial system. He said the recovery still needs support from record-low interest rates.
The Fed chief used his remarks to explain how the central bank will 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 1980's, 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 lend it.
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