Fed chairman signals continued support for low rates

WASHINGTON -- Ben Bernanke sent a message Tuesday to Congress: The Federal Reserve's low-interest-rate policies are giving crucial support to an economy still burdened by high unemployment.

The Fed chairman acknowledged the risks of keeping rates low indefinitely but expressed confidence that such risks pose little threat now.

Delivering the Fed's semiannual monetary report to Congress, Bernanke sought to minimize concerns that the central bank's easy-money policies could cause runaway inflation or dangerous bubbles in assets like stocks. He sought to reassure sometimes-skeptical senators the Fed is monitoring potential threats and can defuse them before they hurt the economy.

Bernanke said the Fed's aggressive program to buy $85 billion a month in Treasurys and mortgage bonds had kept borrowing costs low. That has helped strengthen sectors such as housing and autos, he said.

On budget policy, Bernanke urged Congress to replace automatic spending cuts due to take effect Friday with more gradual reductions in budget deficits in the short run. He noted that the Congressional Budget Office estimates that the automatic spending cuts would shave growth by 0.6 of a percentage point this year.

Bernanke said during the past six months, the economy has grown moderately but unevenly.

"Congress and the administration should consider replacing the sharp, front-loaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run," Bernanke said.

Economists said Bernanke made clear the Fed has no plans to scale back its pace of bond purchases.

"That policy will continue to be supportive for growth, with no sign of imminent plans to scale down [the bond purchases] and certainly no plans to remove accommodation for a very long time," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics.

Addressing concerns the bond purchases, which have pushed the Fed's balance sheet to a record high above $3 trillion, could trigger high inflation, Bernanke said:

"Inflation is currently subdued and inflation expectations appear well-anchored. 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."

The pause in economic growth seen in the final three months of 2012 "does not appear to be a stalling-out of the recovery." He said growth appears to have picked up in the past two months.

d whether the Fed's bond buying could push its balance sheet to $4 trillion. He said it has no target for how much in bonds it plans to buy.

He noted that the Fed's balance sheet is less than that of the Bank of Japan, which has battled for more than two decades to strengthen the sluggish Japanese economy.

Asked about possible threats to the U.S. economy from Europe's financial crisis, including new fears about Italy, he said exposure of American banks to Italy's debt was small.

Bernanke said a bigger threat could emerge if investors grew worried that the debt crisis may suddenly be worsening. He doesn't foresee such a threat.