WASHINGTON — Federal Reserve Chairman Ben Bernanke reaffirmed the central bank's commitment to its massive stimulus program on Tuesday, tamping down speculation of a pullback that spooked stock markets last week.
Testifying before the Senate banking committee, Bernanke said the benefits of the Fed's efforts to keep interest rates near zero are clear. Sales of homes, autos and other durable goods have rebounded. That has helped reduce unemployment and build household wealth, which in turn fuel the engine of the economy: consumer spending.
But critics of the central bank's policies — including some Fed officials — have warned that years of ultra-low interest rates and the Fed's purchase of billions of dollars in bonds each month may be lead to serious unintended consequences, such as inflation. On Tuesday, Bernanke directly addressed those concerns and promised that the Fed would keep its easy-money policies in place "as long as needed."
"Monetary policy is providing important support to the recovery," he said.
Fed officials have already been debating how and when to stop spending $85 billion a month on government and mortgage bonds to prop up the economy, according to details of the Fed's most recent policymaking meetings. And recent speeches by several Fed officials have focused on the risks of the program, known as quantitative easing, to inflation and financial stability. Even that whiff of potential change in Fed policy was enough to send markets for a tailspin last week.
At the hearing, however, Bernanke countered each argument in a spirited defense for staying the course. He noted the toll the recent spike in gas prices is taking on household budgets and emphasized a job market that he said "remains generally weak."
"High unemployment has substantial costs, including not only the hardship faced by the unemployed and their families, but also the harm done to the vitality and productive potential of our economy as a whole," Bernanke said.
He acknowledged that low interest rates might force investors to hunt for higher returns on riskier products, a concern highlighted earlier this month by Jeremy Stein, a Fed governor. But Bernanke said the Fed has stepped up its monitoring of emerging risks. He also argued that low rates can help reduce financial instability by encouraging businesses to use longer-term funding and by lowering the cost of paying off debt.
"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.
He also tried to assure lawmakers that the Fed would unwind its stimulus smoothly. Critics have worried that inflation expectations could rise if the Fed bungles its exit. But Bernanke said that the central bank's profit would likely still be higher than it was before the financial crisis, even if it loses money on its bond purchases.