By: Carolyn O'Hara

Fed Chairman Ben Bernanke outlined plans Wednesday to dismantle some of the central bank's policies put in place during the height of the financial crisis. The Fed, in the future, could sell some of the assets on its balance sheet, raise the interest rate it pays to banks that deposit funds at the Fed, or increase the interest rate it charges for emergency loans.

The series of steps would be taken to tighten credit and prevent inflation once the economy is considered firmly on the path to recovery.

Bernanke took pains to stress in his written testimony that the Fed would be flexible in deciding which combination of tools would be appropriate and that the timing of any changes would depend on the state of the economy.

Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding. We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively.

The Fed chairman, who is in the first month of his second four-year term, was to have testified before the House Financial Services Committee Wednesday morning. The hearing was canceled due to the blizzard in Washington, D.C.