Tuesday, February 26 15:19:52
Federal Reserve Chairman Ben Bernanke strongly defended the U.S. central bank's bond-buying stimulus before Congress today, saying its benefits clearly exceed possible costs.
The Fed chairman also urged lawmakers to avoid sharp spending cuts set to go into effect on Friday, which he warned could combine with earlier tax increases to create a "significant headwind" for the economic recovery.
Bernanke said Fed policymakers are cognisant of potential risks from their extraordinary support for the economy, including the possibility the public loses confidence in the central bank's ability to unwind its stimulus smoothly or the potentially destabilising effect of low rates on key markets.
But he added these did not seem material at the moment, adding the central bank has all the tools it needs to retreat from its monetary support in a timely fashion.
"To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation," Bernanke said in remarks prepared for delivery to the Senate Banking Committee.
Minutes of the Fed's Jan. 29-30 policy meeting, released last week, showed that a number of officials felt the potential risks posed by buying bonds could warrant tapering or ending the program before hiring picks up. However, several others argued there was a danger in halting it prematurely.
Bernanke appeared to be in the latter camp, citing improvements in the housing and auto sectors and tracing them in part to the Fed's stimulus.
He also noted that inflation, one of the risks most often cited by critics of the central bank's so-called quantitative easing, remains projected to stay at or below the Fed's 2 percent target for the foreseeable future.
In response to the financial crisis and deep recession of 2007-2009, the Fed not only slashed official interest rates to effectively zero but also bought more than $2.5 trillion in mortgage and Treasury debt in an effort to push down long-term interest rates and spur investment.
The Fed is currently buying $85 billion in bonds each month and has said it plans to keep purchasing assets until it sees a substantial improvement in the outlook for the labour market.