Federal Reserve chairman Ben Bernanke said the US economy remains hampered by high unemployment and government spending cuts, and tightening policy too soon would endanger the recovery.
"A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further," Bernanke said yesterday in testimony prepared for a hearing at the Joint Economic Committee of Congress in Washington. Monetary policy is providing "significant benefits," he said.
Mr Bernanke is leading the most aggressive economic stimulus in the Fed's 100-year history in an effort to spur growth and reduce an unemployment rate that stands at 7.5pc almost four years into a recovery from the longest and deepest recession since the Great Depression.
While the labour market has shown "some improvement", the Fed chairman said "high rates of unemployment and underemployment are extraordinarily costly".
"Not only do they impose hardships on the affected individuals and their families, they also damage the productive potential of the economy as a whole by eroding workers' skills and – particularly relevant during this commencement season – by preventing many young people from gaining workplace skills and experience in the first place," he said.
William Dudley, president of the Federal Reserve Bank of New York, also signaled that it's too soon to tighten policy.
"Three or four months from now I think you're going to have a much better sense of, is the economy healthy enough to overcome the fiscal drag or not," Dudley said in an interview with Michael McKee on Bloomberg Television.
Fed officials started a third round of asset purchases known as quantitative easing in September and increased them in December to $85 billion a month of Treasuries and mortgage-backed securities.
The Fed aims to drive down interest rates and encourage investors to seek higher returns in riskier assets, broadening the impact of the central bank's stimulus. Lower borrowing costs for households and businesses allow them to refinance and pare debt, freeing up more cash for spending or dividends.
"With unemployment well above normal levels and inflation subdued, fostering our congressionally mandated object- ives of maximum employment and price stability requires a highly accommodative monetary policy," Mr Bernanke said.
The personal consumption expenditures price index rose 1pc for the year ending March, below the central bank's 2pc goal. At the same time, "measures of longer-term inflation expectations have remained stable and continue to run in the narrow ranges seen over the past several years," Mr Bernanke said.
Mr Bernanke's strategy, combined with expectations of faster growth in coming years, has helped support a 17pc rise in the Standard and Poor's 500 Index this year.
Returns on riskier assets have become more attractive with US 10-year notes yielding as little as 1.63pc earlier this month. The 10-year note yielded 1.93pc earlier this week. An index of high-risk, high-yield junk bonds tracked by Bank of America has a total return of 5.4pc this year versus minus 0.3pc for an index of Treasury and agency securities.
The Fed chairman said the central bank is on the watch for financial imbalances that may result from its low interest-rate policy.
He also said another cost of the policy is that savers are receiving low returns.
"Recognising the drawbacks of persistently low rates, the FOMC actively seeks economic conditions consistent with sustainably higher interest rates," the Fed chairman said. "Unfortunately, withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions.
"In considering whether a recalibration of the pace of its purchases is warranted, the committee will continue to assess the degree of progress made toward its objectives in light of incoming information," Bernanke said, referring to the Federal Open Market Committee, the Fed panel that sets monetary policy. (Bloomberg)