WASHINGTON — Federal Reserve Chairman Ben Bernanke on Monday said the central bank will monitor the sliding U.S. dollar but pledged anew to keep interest rates at record lows to nurture the economic recovery.
In remarks to the Economic Club of New York, Bernanke engaged in a delicate dance.
He made clear that Fed policymakers will keep rates at super-low levels. Yet through his words, Bernanke is also trying to bolster confidence in the dollar without actually raising rates, a move that could short-circuit the fragile recovery.
Low interest rates could put additional downward pressure on the dollar. And economists say a free fall in the value of the dollar, while unlikely, can't be entirely dismissed. Still, low rates are needed to encourage consumers and businesses to spend more and fuel the economic rebound.
That's the dilemma for the Fed.
"We are attentive to the implications of changes in the value of the dollar," Bernanke said in rare remarks about the greenback. The Fed will continue to "monitor these developments closely."
Commodity prices — such as oil — have risen lately. That pickup likely reflects a revival in global economic activity and the recent depreciation of the dollar, Bernanke said. Despite "cross-currents" in the outlook for prices, the Fed chief predicted inflation probably will remain "subdued for some time."
That gives the Fed leeway to hold rates at record-low levels for an "extended period," he said, repeating a pledge made at the Fed's meeting earlier month.
The sagging dollar has helped sales of U.S. exports because it makes those goods less expensive on foreign markets. But if the dollar were to plunge in value, it could ignite a new economic crisis in the United States, prompting investors to dump their dollar holdings and driving up domestic interest rates.
"Bernanke is trying to use words — not interest rates — to prevent the dollar from going even lower," said Jay Bryson, global economist with Wells Fargo Securities.
Bryson and other analysts said they didn't think Bernanke was signaling that the Fed would join with central bankers in other countries to intervene in markets to strengthen the dollar. But that is an option for the Fed if the dollar were to start plunging.
The dollar has posted double-digit declines in 2009 against other major currencies since its value peaked against various foreign currencies in March and April.
The dollar is off 19.5 percent against the Canadian dollar since March 9, while it's down 16.3 percent after hitting a high against the euro March 4. The dollar has lost 11.4 percent of its value since peaking against the Japanese yen on April 6.
By holding rates at record-lows, the Fed risks creating a speculative bubble. But Bernanke, fielding questions after his speech, said he didn't see any bubbles forming at this point in the United States. "It's extraordinarily difficult to tell" if a bubble is forming, he acknowledged. "It's not obvious to me in any case."
If a bubble did form, "we use our interest rate tools to try to meet our mandate — full employment and price stability," he said.
Bernanke said the Fed's commitment to the underlying strengths of the U.S. economy, "will help ensure that the dollar is strong and a source of global financial stability."