Bernanke: The Fed Is Ready to Act if the Economy Slows

Federal Reserve Chairman Ben Bernanke wrapped up two days of testimony on Capitol Hill Thursday by reasserting the central bank's commitment to take further action if the the U.S. economy either slows substantially or grows too quickly, risking rising inflation.

Bernanke reiterated that the Federal Reserve's rate-setting committee continues to anticipate that economic conditions will warrant "exceptionally low levels" for the federal funds rate for an extended period.

"At some point, however, the committee will need to begin to remove monetary policy accommodation to prevent the buildup of inflationary pressures," Bernanke told the House Financial Services Committee, reading from the same statement he delivered Wednesday to the Senate Finance Committee.

"When that time comes, the Federal Reserve will act to increase short-term interest rates by raising the interest rate it pays on reserve balances that depository institutions hold at Federal Reserve Banks," Bernanke added.

Bernanke reiterated the Fed's most recent economic forecast, which predicts moderate growth, low inflation and a labor market that will probably require a significant amount of time "to restore the nearly 8.5 million jobs that were lost over 2008 and 2009."

What the Fed Chair Didn't Say Is Equally Important

However, beyond the his statement that the Fed remains prepared to take further actions as warranted, Bernanke's testimony took on a more hawkish tone. Notably, the Fed chief didn't address the possible elimination of the 0.25% interest rate the Fed pays on excess reserves, a move that could be made to increase banks' incentives to make more loans.

Likewise, his statement did not contain the announcement of a new credit facility -- or the increase in size of an existing facility -- to help increase bank lending to small- and medium-sized businesses.

Meanwhile, in the event that the U.S. economic recovery unexpectedly accelerates with an accompanying rise in inflation, Bernanke said the Fed's unwinding of quantitative easing could include, among other options, reinvesting maturing Treasuries into short-term investments, selling mortgage-backed debt, or raising interest rates on bank deposits held by the Fed.