MercoPress. South Atlantic News Agency

Bernanke says stimulus plan directed to create jobs; discards threats of inflation

Romney has said that if elected he would not re-nominate the Fed chief

Federal Reserve Chairman Ben Bernanke delivered a broad defence on Monday of the central bank's controversial bond-buying stimulus plan, saying its actions are necessary to support a flagging economic recovery.

Bernanke pushed back against accusations that the Fed's policy is laying the groundwork for inflation in the future or enabling the government to run large budget deficits.

He said that while the country's unusually weak economic performance had forced the Fed to resort to less conventional tools after bringing interest rates all the way down 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.

He reiterated the Fed's commitment, made at the September meeting where it announced a new, open-ended program of asset purchases, 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.

The Fed chief noted inflation has fluctuated close to Fed officials' target of 2%, and that inflation expectations have remained stable, suggesting low risk of a sudden spurt of price rises.

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 US economy expanded at a paltry 1.3% annual rate in the second quarter, far less than what is needed to bring down the country's elevated 8.1% jobless rate.

In response to the financial crisis and deep recession of 2007-2009, the Fed slashed official borrowing costs down to rock bottom and bought some 2.3 trillion dollars in mortgage and Treasury securities in an effort to keep down long-term rates and stimulate investment.

These actions were not without critics, including many Republicans, who have argued they threaten future inflation. The party's presidential candidate, Mitt Romney, has vowed if elected to not re-nominate Bernanke, himself a Republican, to a third term when his current one expires in January 2014.