Bernanke Affirms Near-Zero Interest Rate Policy

Federal Reserve Chairman Ben Bernanke told lawmakers Thursday that near-zero short-term interest rates are still required to bolster the nascent economic recovery and the central bank has other tools to reduce the threat of inflation when the time comes.

Bernanke, testifying before the House Financial Services Committee on the Fed's planned exit strategy from the extraordinary measures enacted to stabilize the financial system, said the central bank must remain flexible in its policy stance.

"The economy continues to require the support of accommodative monetary policies," Bernanke said in his prepared remarks. "However, we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus. We have full confidence that, when the time comes, we will be ready to do so."

Unemployment, currently running at 9.7%, is at the highest level since the early 1980s and is forecast to remain stubbornly elevated through next year. More than 8.4 million Americans have lost their jobs since the onset of the recession at the end of 2007. With inflation expected to remain subdued for the foreseeable future, the Fed has made it clear that job creation is its top priority.

Bernanke said that the very large volume of reserves in the banking system could make the federal funds rate -- the central bank's key interest rate tool -- a less reliable indicator than usual of conditions in short-term money markets. Accordingly, the Fed is considering alternative measures to tighten credit, including raising the interest rate paid on reserves, the Fed chief said.

"Reducing the quantity of reserves will lower the net supply of funds to the money markets, which will improve the Federal Reserve's control of financial conditions by leading to a tighter relationship between the interest rate on reserves and other short-term interest rates," Bernanke said.

Other tools to withdraw liquidity form the banking system could be repurchase agreements and setting up term deposit facilities for depository institutions, the Fed chief told lawmakers in a hearing originally scheduled for February that was canceled because of snow.