Federal Reserve (Fed) Chairman Ben Bernanke told U.S. lawmakers on Tuesday that the pace of economic decline appears to be slowing, but the labor market remains weak and, in response, the Fed is likely to maintain interest rates at “exceptionally low levels for extended periods.” Testifying before the House of Representatives Committee on Financial Services, Bernanke said that despite the positive signs of an improvement in the economy, “the job-loss rate remains high and the unemployment rate continues its steep rise.” The weak labor market combined with falling home prices and tight credit are hurting households and undermining “the recent stabilization in household spending,” he said. Regarding inflation, Bernanake said it was not currently a risk justifying an increase in interest rates to limit it. All of his Fed colleagues “expect that inflation will be somewhat lower this year than in recent years, and most expect it to remain subdued over the next two years.” At the height of the credit crisis in late 2008, the central bank extended $1.5 billion in short-term loans to financial institutions, flooding the financial system with liquidity in an effort to restart lending to businesses and consumers. As signs emerged in recent weeks that the economy was stabilizing and credit was easing, however, the concern is that if the Fed fails to absorb the excess money from the economy in time, there could be a spike in inflation. Bernanke sought to assure lawmakers that the Fed would be able to prevent a jump in inflation when the economic recovery starts, but added that any such steps would be far in the future as the central bank's focus remains “fostering economic recovery.” “We … believe that it is important to assure the public and the markets that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation,” the Fed chief said.
