Bernanke signals continued support for low interest rates

WASHINGTON (AP) - The Federal Reserve's low interest-rate policies are giving key support to an economy still burdened by high unemployment, Chairman Ben Bernanke told Congress on Tuesday. Bernanke signaled that the Fed's efforts to keep borrowing costs low will continue.

In a statement, Bernanke acknowledged that the Fed's aggressive program to buy $85 billion a month in Treasurys and mortgage bonds to keep rates low could eventually ignite inflation or unsettle investors. Several Fed policymakers said at their most recent meeting that the Fed might have to scale back its bond purchases because of those risks.

But Bernanke, delivering the Fed's semiannual report to Congress, said the risks remained contained for now.

On budget policy, Bernanke urged Congress to replace the automatic spending cuts due to start Friday with more gradual reductions in budget deficits in the short run.

Bernanke's testimony to the Senate Banking Committee is being watched by investors concerned about the doubts raised by some Fed officials about whether the bond purchases should continue. The bond purchases represent the third round of a program intended to strengthen sectors such as housing and autos through lower borrowing costs.

"Keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods," Bernanke said.

Bernanke addressed concerns that the Fed's purchases, which have pushed its balance sheet above $3 trillion, could trigger high inflation.

"Inflation is currently subdued and inflation expectations appear well-anchored," he said. "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 that over the past six months, the economy has grown moderately but unevenly. He said the pause in growth seen in the final three months of 2012 "does not appear to be a stalling-out of the recovery." He said growth appears to have picked up in the past two months.

Shortly before Bernanke spoke, several reports pointed to surprising economic strength: Americans' confidence in the economy rebounded this month, new-home sales jumped in January to the highest level since 2008, home prices rose at a healthy pace in December compared with a year ago and profits of U.S. banks jumped last quarter to the highest level in six years.

On the battle in Washington over how to restrain budget deficits, Bernanke said it's important not to cut the deficit too much while economic growth remains fragile. He noted that the Congressional Budget Office estimates that the automatic spending cuts that take effect Friday would trim growth by 0.6 percentage point this year.

"Congress and the administration should consider replacing the sharp, front-loaded 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," Bernanke said.