Ben Bernanke, the chairman of theFederal Reserve, said on Friday that pulling back on aggressivepolicy measures too soon would pose a real risk of damaging astill-fragile recovery.
There has been some disagreement within the Fed of whetherthe U.S. central bank's bond-buying program, which is designedto push down long-term interest rates, should be phased out.
Fed Board Governor Jeremy Stein argued recently there weresigns of overheating in certain financial markets and that thecentral bank should consider using monetary policy to addresssuch risks if they persist.
The Fed chief was not convinced, saying that, even for thepurposes of financial stability, a continuation of the centralbank's aggressive stimulus, conducted through purchases ofTreasury and mortgage securities, remains the optimal approach.
"In light of the moderate pace of the recovery and thecontinued high level of economic slack, dialing backaccommodation with the goal of deterring excessive risk-takingin some areas poses its own risks to growth, price stability,and, ultimately, financial stability," Bernanke said in remarksprepared for delivery at a conference sponsored by the FederalReserve Bank of San Francisco.
In response to the financial crisis and deep recession of2007-2009, the Fed not only chopped official rates toeffectively zero, but also bought more than $2.5 trillion inassets in an effort to keep long-term rates low.
Still, economic growth remains subdued and is expected toregister just 2 percent this year, while the jobless rateremains elevated at 7.9 percent currently.
"Premature rate increases would carry a high risk ofshort-circuiting the recovery, possibly leading - ironicallyenough - to an even longer period of low long-term rates,"Bernanke said.
He noted that a stimulative monetary policy was simply aresponse to economic conditions, rather than any attempt to keeprates artificially low to inflate asset prices.
Policymakers are cognizant of possible risks to financialstability, he said, while indicating a preference for employingregulatory and supervisory tools to mitigate any possiblefallout from the Fed's low-rate policy.
"We pay special attention to developments at the largest,most complex financial firms," Bernanke said.
He argued banks had gone some way toward repairing theirbalance sheets since the financial crisis. The Federal DepositInsurance Corp. reported this week that bank profits rose in2012 to their highest levels since 2006, the year before thesubprime mortgage meltdown gained momentum.
Earlier this week, Bernanke delivered a strong defense ofthe Fed's unconventional monetary policies in testimony beforeCongress. He also warned lawmakers to avoid the loomingshort-term spending cuts known as the sequester.