Federal Reserve Chairman Ben Bernanke strongly defended the central bank's easy monetary policy before a Senate committee on Tuesday and said there's little risk of a spike in inflation in the near term.
In criticizing the central bank's easy monetary policy, Sen. Bob Corker, a Republican from Tennessee, called Bernanke the biggest dove since World War II.
Bernanke was quick to push back. "You called me a dove, well maybe in some respects I am, but on the other hand my inflation record is the best of any Federal Reserve chairman in the postwar period – or at least one of the best," he said, citing the 2 percent average inflation rate.
He also told Congress that the Fed is not engaged in a global currency war and said that expansionary monetary policy is not a "beggar thy neighbor" policy.
Bernanke noted that inflation, one of the risks most often cited by critics of the central bank's so-called quantitative easing, remains projected to stay at or below the Fed's 2 percent target for the foreseeable future.
Earlier in the questioning, Bernanke said that accommodative monetary policy has not meant a trade-off between the Fed's dual mandate to promote maximum employment and keep inflation in check. "It has supported real growth in employment and kept inflation close to our target," he told the Senate panel.
When it comes time to start unwinding the bond-buying program, Bernanke said that it's unlikely the Fed will have to liquidate a large portion of its bond portfolio. "We could exit without ever selling by letting it run off and we could tighten policy by raising interest rates we pay on reserves," Bernanke said. But he added that the Fed was likely to sell slowly with plenty of guidance about its intentions.
Furthermore, Bernanke expects that quantitative easing to benefit government coffers. "The Federal Reserve's balance sheet policies are with very high probability going to be a very significant boon to the taxpayer in terms of returns to the Treasury," he said.
There was also a feisty exchange between Bernanke and Sen. Elizabeth Warren, a Democrat from Mass. and Wall Street critic, who pressed the Fed chairman on getting rid of "too big to fail" in the financial industry.
While Bernanke told Congress that ending too big to fail was incredibly important and steps have been taken, Warren pressed Bernanke on when it would actually end.
"Over time you'll see increasing market expectations that these institutions can fail," Bernanke said. The Fed chairman also predicted that the benefits of being large are likely to decline over time and that some banks would voluntary reduce their size.
The Fed chairman also urged lawmakers to avoid sharp spending cuts set to go into effect on Friday, which he warned could combine with earlier tax increases to create a "significant headwind" for the economic recovery.
Bernanke said Fed policymakers are cognizant of potential risks from their extraordinary support for the economy, including the possibility the public loses confidence in the central bank's ability to unwind its stimulus smoothly or the potentially destabilizing effect of low rates on key markets.
But he added these did not seem material at the moment, adding the central bank has all the tools it needs to retreat from its monetary support in a timely fashion.
"To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation," Bernanke said in remarks prepared for delivery to the Senate Banking Committee.
Minutes of the Fed's January 29-30 policy meeting, released last week, showed that a number of officials felt the potential risks posed by buying bonds could warrant tapering or ending the program before hiring picks up. However, several others argued there was a danger in halting it prematurely.
Bernanke appeared to be in the latter camp, citing improvements in the housing and auto sectors and tracing them in part to the Fed's stimulus.
In response to the financial crisis and deep recession of 2007-2009, the Fed not only slashed official interest rates to effectively zero but also bought more than $2.5 trillion in mortgage and Treasury debt in an effort to push down long-term interest rates and spur investment.
The Fed is currently buying $85 billion in bonds each month and has said it plans to keep purchasing assets until it sees a substantial improvement in the outlook for the labor market.
In unusually direct remarks on fiscal policy, Bernanke warned that the near-term spending cuts known as the sequester, which are set to take hold later this week, threaten an already challenged economic expansion.
"In terms of the near-term recovery, there's a senses monetary and fiscal policy are working at cross purposes," he said in response to questioning.
"To some extent the fiscal policy decisions being made are mismatched with the timing of the problem," he added. "The problem is a longer-term problem and should be addressed over a longer time frame."
(Read More: Bernanke and Sequestration)
In his prepared remarks, Bernanke said, "The Congress and the administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration, with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run."
"A substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery," he said.
The U.S. economy braked sharply in the fourth quarter, but is generally forecast to grow around 2 percent or more this year. Unemployment has remained elevated, and registered 7.9 percent in January.
Bernanke said persistent joblessness was a scourge with potentially long-lasting effects for the United States.
"High unemployment has substantial costs, including not only the hardship faced by the unemployed and their families, but also the harm done to the vitality and productive potential of our economy as a whole," Bernanke said.
— Reuters contributed to this report.
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