Bernanke says premature Fed tightening would endanger recovery

Federal Reserve Chairman Ben S. Bernanke said the U.S. 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 today in testimony prepared for a hearing at the Joint Economic Committee of Congress in Washington. Monetary policy is providing “significant benefits,” he said.

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 7.5% almost four years into a recovery from the longest and deepest recession since the Great Depression.

While the labor 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.

Dudley Comments

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 that aired today.

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 objectives of maximum employment and price stability requires a highly accommodative monetary policy,” Bernanke said.

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