TOPICS > Economy

Bernanke: Fed has Stimulus Exit Strategy

BY Admin  July 21, 2009 at 12:30 PM EST

Ben Bernanke, Getty Images

Bernanke began two days of testimony Tuesday on the health
of the U.S.
economy as questions persist about future involvement of the Federal Reserve
and the fear of inflation during the biggest recession since the Great Depression.

Bernanke said in his opening comments to the House Financial
Services Committee that the bank’s focus is to foster economic recovery and
will be able to prevent inflation despite a pledge to keep a key bank lending
rate at a near zero rates.

Bernanke said that the outlook for the U.S. economy is
brighter and that the Fed will remove its massive monetary stimulus from the
economy as soon as it can.

Laying out a plan now to reel in the Fed’s stimulus may give
Bernanke more leeway to hold rates at record lows to brace the economy. That’s
because doing so could tamp down investors’ fears that the Fed’s aggressive
actions to lift the country out of its longest recession since World War II
could spur inflation later on.

The Fed chairman is expected to face tough questions from
lawmakers who are concerned about the size of taxpayer funds used to prop up
important financial institutions and a dramatic increase in the bank’s balance
sheet in order to foster a liquid financial system.

“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crisis and the recession can be withdrawn in a smooth and timely manner as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,” Bernanke said.

Bernanke also cautioned that unemployment would remain high
into 2011and that any recovery in the economy would be gradual. The U.S.
unemployment rate climbed to a 26-year high of 9.5 percent in June. The Fed says
it could rise as high as 10.1 percent this year, and stay elevated into 2011.
The post-World War II high was 10.8 percent at the end of 1982, when the
country had suffered through a severe recession.

In an editorial in the Wall Street Journal published Tuesday,
Bernanke said that economic conditions will not allow the Fed to tighten its monetary
policy for an “extended period”

“We will calibrate the timing and pace of any future
tightening, together with the mix of tools to best foster our dual objectives
of maximum employment and price stability,” he wrote.