Bernanke defends Fed’s low interest rate policies

WASHINGTON (AP) — Chairman Ben Bernanke is standing by the Federal Reserve’s low interest rate policies, cautioning that any move to raise rates prematurely could derail a still-modest economic recovery.

Bernanke also sought to calm fears that super-low rates risk igniting inflation or rattling investors, during a speech late Friday in San Francisco to an economic conference sponsored by the San Francisco Federal Reserve Bank.

The central bank’s low-rate policies are intended to encourage borrowing and spending to boost the economy. Higher rates would make borrowing more expensive.

Bernanke said the Fed’s policies mirror what other central banks around the world are doing.

“Long-term interest rates in the major industrial countries are low for a good reason: Inflation is low and stable and, given expectations of weak growth, expected real short rates are low,” he said.

“Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading — ironically enough — to an even longer period of low long-term rates,” he said.

His comments amplified testimony he gave to Congress this week.

Critics, including some Fed regional bank presidents, have expressed concerns that the Fed may be raising the risk of inflation through its purchases of Treasury bonds and mortgage-backed securities.

As he did in his appearance before House and Senate committees this week, Bernanke sought to provide reassurance that the central bank is closely monitoring developments in financial markets to guard against such risks.

He said 2010 financial regulatory overhaul has forced banks to boost the required capital on hand to cushion against losses. The Fed also conducts annual stress tests to make sure that the nation’s largest financial institutions have sufficient resources to survive adverse economic conditions, he said.

“We pay special attention to developments at the largest, most complex financial firms, making use of information gathered in our supervision of the institutions,” Bernanke said.

During a question period after his speech, Bernanke was asked what he believed were the most significant lessons learned from the financial crisis. Prior to serving as Fed chairman, Bernanke had been a college professor at Princeton who researched mistakes made by the Federal Reserve during the Great Depression.

Bernanke said there was a need for better oversight of the financial system. And he noted that assets such as housing can quickly become significantly overpriced. But he said in many ways, the 2008 crisis had all the elements of a typical bank run.

“It was analogous to things that happened in the 19th century,” said Bernanke. “It is just that it is a much more complex framework” today.

In his speech, Bernanke said current forecasts project long-term interest rates will rise only gradually in the next several years. Rates for 10-year Treasury bonds might rise by between two and three percentage points between now and 2017, he said. The 10-year Treasury is currently trading around 1.9 percent.

But Bernanke also referenced a time in the past when the Fed began tightening credit and rates rose more rapidly. In 1994, the yield on the 10-year Treasury rose more than two percentage points in just 12 months, he noted.