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The U.S. Federal Reserve Chairman Ben Bernanke warned against tightening monetary policy too soon, in testimony before the Congress on Wednesday.
"A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending economic recovery and causing inflation to fall further," Bernanke told the Joint Economic Committee.
In the highly anticipated speech, Bernanke said Fed officials recognized the drawbacks of persistently low rates and sought economic conditions consistent with "sustainably higher" interest rates, but "withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions."
Bernanke also said recalibration of the Fed's massive bond-buying program would depend on incoming information about the health of the economy.
The central bank is currently buying 85 billion dollars in Treasury and mortgage bonds per month to keep borrowing costs low and spur growth and hiring.
Bernanke said economic growth had continued at a "moderate pace" so far this year and first-quarter growth was supported by continued expansion in demand by U.S. households and businesses, which more than offset the fiscal drag caused by the government spending cuts.
He cautioned that, despite recent improvement, the U.S. job market remained weak overall and the unemployment rate was still well above its longer-run normal level.
In defence of the Fed's highly accommodative monetary policy, Bernanke said it brought significant benefits to the economy. Taking the resurgent housing market as evidence, he noted the low mortgage rates and improved sentiment on the part of potential buyers had supported the housing recovery, which in turn boosted construction and real estate jobs.
Bernanke warned that, while some of the headwinds had begun to dissipate recently, the tax increases enacted from the beginning of the year, along with the sequestration, would exert a substantial drag on the economy this year.
He urged fiscal policymakers to put the federal budget on a sustainable long-run path while minimizing the near-term fiscal headwinds facing the economic recovery.
Bernanke's comments will be followed later in the day by release of the minutes of the Fed's last meeting on April 30-May 1. The statement the Fed issued after that meeting signaled it would either increase or reduce the pace of its bond purchases depending on how the economy evolves.
The minutes will be scanned for clues of how much dissension exists within the Fed policy-setting committee about when or how to dial back the aggressive stimulus efforts.
