SEN. BUNNING:  On Tuesday, the Treasury announced that they were starting up a supplemental financing program again. Under -- that's $200 billion- plus -- under that program, Treasury issues debts and deposits the cash with the Fed. That is an effective -- same thing as the Fed issuing its own debt, which you know is not legal.

MR. BERNANKE: What it does --

SEN. BUNNING: There are -- let me get finished with the question and you can answer.

What are the legal grounds that the Fed and Treasury used to justify that program, and did anyone in the Fed or Treasury object when the program was created?

MR. BERNANKE: Well legally, we are the fiscal agent of the Treasury and we hold Treasury balances that they -- for all kinds of purposes.

So it's -- there's no --

SEN. BUNNING: But they're not allowed to issue debt -- Treasury.

MR. BERNANKE: Treasury's allowed to issue debt.

SEN. BUNNING: On its own?

MR. BERNANKE: I don't -- they issue bills and other kinds of debt all the time.

SEN. BUNNING: Oh -- I mean -- yes.

Treasury Notes, Treasury Bills, Treasury Two-years, Five-years, Ten-years -- but you're buying their debt.

MR. BERNANKE: We're just paying them interest on their deposits on our balance sheet.

SEN. BUNNING: Okay. That isn't the answer that I wanted.

From the Q&A session

GARRETT: Let me talk to you -- change subjects -- with regard to bonds and the Fed issuing bonds. I know there was new authority to the Fed back last year, end of last year, for you to pay interest on reserves. And there was talk about the Fed actually issuing bonds.  And then there was this proposal as far as you creating something called a term deposit facility, right?

And this basically would allow, if I understand it correctly, like, a six-month period of time for short-term -- for the short-term bonds, which is very similar to just regular short-term bond issuance, with the main difference being that, unlike a bond, the term deposit can't be traded on the marketplace, right?   If you were -- well, first of all, do you have authority to do that? 

BERNANKE: Yes, because it comes under our authority to pay interest on reserves. We can't sell those (inaudible) deposits to anybody, only to banks who have reserves with us.

So it's not -- we can't -- it's not an open that you and I can't -- couldn't purchase them.

GARRETT: OK, so do you see that, in any way, coming up to the edge, as far as the authority, as far as the Fed being able to issue bonds, as skirting the spirit of the law as to what the Fed should be doing when it comes to the...

BERNANKE: The -- the Congress, very appropriately, gave us the authority to pay interest on reserves, and that's what this would be. Only reserves would be in these accounts.

So I think that's -- I don't see -- really see any issue with it. And I would add -- this doesn't answer your question, but I would add that every central bank in the world -- major central bank -- has these kinds of authorities, and they're very important for managing short-term interest rates in a period like -- like the present.

GARRETT: OK. And going back to the beginning part of the question, though, was the initial discussion was, at least, by some, as far as being -- having the authority to issue bonds that would be just widely circulated or sold in the marketplace...

BERNANKE: So-called Fed bills.

GARRETT: Yes. Where are we -- or where are you with regard to that?

BERNANKE: We're not proposing that now.

GARRETT: OK. Thank you.

From the Q&A

You could...have the central bank issue its own debt, which sounds radical from the U.S. perspective but is actually done by some foreign central banks. That would require an act of Congress to get that authority, and it is not too clear that Congress would be willing to allow the central bank to issue debt outside of the debt ceiling, which is established by the Congress.

If we’re going to go the supplemental financing programme route, we need SFPs to be exempt from the debt ceiling. The other approach is the Fed bill approach. It’s not subject to the debt limit. [Fed bills] can be sold broadly in the market, for example to money-market mutual funds. The problem is then there are two issuers of US government obligations. You don’t want both a three-month Fed bill and a three-month T-bill. It creates confusion. I don’t think it’s a big problem; lots of central banks have authority to issue central bank bills. We don’t want to be in the Treasury’s way so we’d probably restrict maturity to less than 30 days so they have 30 days and up.

I think Treasury is quite sympathetic to letting us do one or the other. We’d like Congress to consider it. It’s nice to have—as opposed to critical. That said, if I could get a belt and suspenders, I’ll take belt and suspenders. As long as people are worried about whether we have adequate tools, it makes sense for us to get more tools even if we don’t think we need them.

An alternative approach... would be something completely new for the Federal Reserve—that’s to issue interest-bearing debt broadly to private investors. Let’s call this debt Fed bills. Congress would have to authorize this, but it too is a tool available to many central banks. The sale of Fed bills would reduce the reserves of the banking system, as in a typical contractionary open-market operation. As with interest on reserves, we could accomplish a tightening of policy while maintaining our support of credit markets. But Fed bills would have an advantage over interest on reserves. The loans to the Fed would come from investors throughout the economy, not just from banks. At a time when we need banks to lend to the private sector to fight a credit crunch, this is a decided plus.