Bernanke: Fed has Stimulus Exit Strategy

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that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation,” Bernanke said.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.