* Stimulus to remain even as economy recovers
* Fed believes it can help employment outlook
* U.S. central bank not monetizing debt, Bernanke says
(Adds details, background, comments)
By Ann Saphir
INDIANAPOLIS, Oct 1 (Reuters) - Federal Reserve Chairman Ben Bernanke on Monday delivered a broad defense of the U.S. central bank's controversial bond-buying stimulus plan, saying it is necessary to support a flagging economic recovery.
Bernanke pushed back against accusations that the Fed's policy is laying the groundwork for inflation, enabling the government to run large budget deficits, un dercutting the dollar and hurting savers.
He said that while the country's unusually weak economic performance had forced the Fed to resort to less conventional tools after lowering interest rates to effectively zero, the Fed's goals of price stability and maximum sustainable employment have not changed.
"These goals mean, basically, that we would like to see as many Americans as possible who want jobs to have jobs, and that we aim to keep the rate of increase in consumer prices low and stable," Bernanke told the Economic Club of Indiana.
In response to the financial crisis and deep recession of 2007-2009, the Fed slashed overnight borrowing costs to rock bottom and bought some $2.3 trillion in mortgage and Treasury securities in an effort to keep down long-term rates and stimulate investment.
Last month, the central bank said it would buy $40 billion in mortgage-backed securities every month until the jobs outlook improved substantially as long as inflation remained contained.
The Fed's unconventional efforts to spur growth have not been without critics, including many Republicans, who have argued they threaten future inflation and were abetting profligate spending in Washington. The party's presidential nominee, Mitt Romney, vowed if elected he would not renominate Bernanke, himself a Republican, to a third term.
In his speech, Bernanke essentially laid out a primer on the Fed's policies that took on the criticisms one-by-one.
In doing so, he underscored the central bank's resolve to continue pushing for stronger growth and more job creation, reiterating the commitment the Fed made at its September meeting to keep a heavy dose of monetary stimulus in place even after the economic rebound appears to gain traction.
"As long as price stability is preserved, we will take care not to raise rates prematurely," Bernanke said.
Text of Bernanke's speech: Take a Look on Fed policy:
NEW PARTY, SAME PUNCH BOWL
The Fed chief noted inflation had fluctuated close to Fed officials' target of 2 percent for a long time, and that inflation expectations have remained stable, suggesting low risk of a sudden spurt of price rises.
He also downplayed fears that the central bank's policies would damage the long-run value of the dollar, saying the stronger growth that Fed officials are trying to engender would actually support the currency.
"I don't see any inconsistency with our policy and maintaining a strong dollar," he said.
Bernanke expressed confidence that the Fed had the right tools to keep inflation at bay and suggested the central bank's unconventional policy easing made the challenge of knowing when to remove stimulus no greater now than in the past.
"Determining precisely the right time to 'take away the punch bowl' is always a challenge for central bankers, but that is true whether they are using traditional or nontraditional policy tools," Bernanke said. "The Federal Reserve's price stability record is excellent, and we are fully committed to maintaining it."
He also argued against the notion that the Fed was monetizing the federal debt or effectively printing money to keep the government's borrowing costs low.
"That's not what's happening, and that will not happen," Bernanke said. "We are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates."
The U.S. economy expanded at a paltry 1.3 percent annual rate in the second quarter, far less than what is needed to bring down the country's elevated 8.1 percent jobless rate.
Bernanke disputed the charge that the Fed's policies are damaging savers, arguing they will also benefit from a strong and growing economy.
(Writing by Pedro Nicolaci da Costa; Editing by Andrea Ricci and Tim Ahmann)
Keywords: USA FED/