- Bernanke systematically went through the costs and risks of its third round of quantitative easing
- He took "very seriously" the risk that a long period of low interest rates could damage financial stability
- Bernanke said that the Fed has stepped up its monitoring of the financial system
played down concerns about quantitative easing limits in dovish testimony to Congress that suggests the U.S. Federal Reserve will continue to purchase assets.
The Fed chairman systematically went through the costs and risks of its third round of quantitative easing, known as QE3, and argued that they were either offset by other benefits or else the central bank had them under control.
Mr Bernanke's testimony to the Senate banking committee resets the Fed's public stance after minutes of its recent meetings showed that "many" on the rate-setting Federal Open Market Committee are concerned about the costs and risks of QE3.
His remarks suggest that those concerns are not so great that the Fed might cut short QE3 -- under which it is buying assets at a pace of $85bn a month -- before meeting its goal of a substantial improvement in the labour market.
Mr Bernanke said that the benefits of asset purchases are clear. "Monetary policy is providing important support to the recovery while keeping inflation close to the FOMC's 2 per cent objective."
The chairman said he took "very seriously" the risk that a long period of low interest rates could damage financial stability -- a point raised by Fed governor Jeremy Stein in a recent speech -- but he argued that cheap money lowered risk in other ways.
"In the present circumstances [low rates] also serve in some ways to reduce risk in the system, most importantly by encouraging firms to rely more on longer-term funding, and by reducing debt service costs for households and businesses," said Mr Bernanke.
He said that the Fed has stepped up its monitoring of the financial system. "To this point 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."
Mr Bernanke also dismissed concerns that a large balance sheet will cause the Fed to lose money when it eventually has to sell assets. He said that the Fed's average profits since the financial crisis would still be higher, and QE's effect on the federal budget by boosting the economy would dwarf any effect from higher or lower profits.
In cautiously optimistic remarks on the US economy, Mr Bernanke said that it has "continued to expand at a moderate if somewhat uneven pace" and "growth has picked up again this year".
But with the unemployment rate still at 7.9 per cent, he noted that "the job market remains generally weak, with the unemployment rate well above its longer-run normal level", and pointed to concerns about long-term joblessness.
Mr Bernanke also called on Congress and the Obama administration to replace sequestration -- automatic spending cuts due to hit on Friday that could knock 0.6 percentage points off growth this year -- with a larger but longer-term programme of deficit reduction.
"Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget," said Mr Bernanke.
He said that allowing the sequestration to take effect would hurt jobs and incomes and could damage the cause of deficit reduction by slowing economic growth. "Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant," said Mr Bernanke.