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UPDATE 1-Financial stability concerns should not deter Fed on policy: Bernanke

Jonathan Spicer and Jason Lange
Thursday, 16 Jan 2014 | 12:31 PM ET

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WASHINGTON, Jan 16 (Reuters) - The U.S. Federal Reserve should give the economy the stimulus it needs despite "credible" worries that its massive bond-buying program could destabilize the financial system, Fed Chairman Ben Bernanke said on Thursday.

In his last planned public remarks as head of the central bank, Bernanke said concern about the potential harm to financial stability is the only risk from unconventional monetary policies "that I find personally credible."

But, he added "at this point we don't think that, and I think I can speak for my colleagues on this, we don't think that financial stability concerns should at this point detract from the need for monetary policy accommodation, which we are continuing to provide," Bernanke said.

During his tenure, Bernanke pushed the Fed far into unconventional territory, not only slashing short-term interest rates to zero and keeping them there since December 2008, but providing long-term "forward guidance" assuring investors the Fed would keep interest rates low for a long time to come.

In a second unprecedented move, he quadrupled the Fed's balance sheet to $4 trillion through three rounds of bond-buying aimed at lowering long-term rates and spurring hiring.

"I do think by the way that they both have been helpful," Bernanke said at a Brookings Institution event. And neither, he said, have delivered the potential costs that many warned they would, including unbridled inflation.

Inflation, by the Fed's preferred gauge, has risen just 1.1 percent in the past 12 months, well below the Fed's 2-percent target.

Janet Yellen, currently Fed vice chair, will take the reins as Fed chair on Feb. 1, just after the Fed's first policy-setting meeting of the year.

Last month, the Fed took a first step toward dialing down its massive stimulus with a decision to reduce monthly purchases of Treasuries and mortgage-backed securities to $75 billion from $85 billion a month.

The Fed will probably phase the program out entirely late in the year, Bernanke said at the time.

He also told investors that the Fed was nowhere near to tightening policy, saying the U.S. central bank would keep rates near zero until "well past the time" that unemployment falls to 6.5 percent, especially if inflation continues to linger below the Fed's 2-percent target.

Unemployment fell to 6.7 percent in December.