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Bernanke sees tighter policies as economy heals

(Agencies)
Updated: 2009-10-09 11:22

WASHINGTON: The US Federal Reserve must continue to prop up the economy for an extended period but can't do so indefinitely for fear of triggering an inflationary surge, Federal Reserve Chairman Ben Bernanke warned on Thursday.

Chairman of the Federal Reserve Ben Bernanke speaks at the Federal Reserve Conference on Key Developments in Monetary Policy in Washington October 8, 2009. Bernanke said on Thursday that while the US central bank's vast support for the economy will likely be needed for a while, the Fed will have to remove those measures as the economy heals to ward off inflation. [Agencies]

The US central bank has cut interest rates to near zero percent and pumped hundreds of billions of dollars into the financial system to counter the worst financial crisis since the Great Depression.

At a Fed conference, where he discussed the central bank's ballooning balance sheet, Bernanke made clear that policymakers were thinking how to terminate support as recovery sets in.

"Accommodative policies will likely be warranted for an extended period," Bernanke told participants at the conference held in the Fed's headquarters.

"At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road."

Bernanke sent a signal the Fed is gradually but steadily moving toward an exit from its supportive policies, even while evidence of the recovery has been mixed.

Related readings:  China's proactive fiscal policy to continue  Zoellick: World economy still precarious  Signs of a slow recovery in US  G7 finance ministers warn recovery 'fragile'  Global meltdown not over yet: IMF official

A report last week showing that US employers shed more jobs than expected in September dented confidence in the recovery. But data released on Thursday showed gains in retail sales and a nine-month low in unemployment claims reinvigorated optimism.

The dollar inched up from 14-month lows against a basket of currencies after Bernanke's comments, while his Fed colleague, Kansas City Fed President Thomas Hoenig, also warned of the perils of leaving rates too low for too long.

"I don't believe necessarily an indefinite period of very accommodative policy is in the long-run best interests of the country," he told an economic forum hosted by his bank in Oklahoma City.

"If you leave it at zero for too long a period, then we will have other issues," said Hoenig, who is seen as one of the more hawkish, or anti-inflation members of the Fed's policy-setting committee, where he will be a voter next year.

The dollar has been under pressure as the U.S. economy has lagged some other economies in recovering from a crisis that reverberated around the world.

On Tuesday, Australia became the first of the Group of 20 big industrialized and developing economies to increase borrowing costs, saying that the worst danger for the economy had passed.

Hoenig, asked by the audience about the Australian central bank's decision, said this reflected the better performance of the country's economy.

In the United States, most analysts do not see the Fed raising rates until the middle of next year.

And the European Central Bank on Thursday cautioned against hopes of a speedy economic recovery in the 16-nation euro zone as it left benchmark interest rates at a record low 1.0 percent on Thursday for the fifth month in a row.

ECB President Jean-Claude Trichet also turned up the heat on governments to rein in ballooning budget deficits, and said he saw hopeful signs of a normalization in money markets given lower demand for central bank loans.

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