By Karen Jacobs
ATLANTA (Reuters) - Federal Reserve Chairman Ben Bernanke said Tuesday the latest figures on housing and consumer spending suggest a rapid contraction in the economy could be easing.
"Recently we have seen tentative signs that the sharp decline in economic activity may be slowing, for example, in data on home sales, homebuilding and consumer spending, including sales of new motor vehicles," Bernanke said in remarks at Morehouse College.
Some recent reports have suggested a moderating of the economy's downturn but data Tuesday was less encouraging, with the Commerce Department reporting retail sales fell 1.1 percent in March where economists had foreseen a 0.3 percent rise.
The Fed has cut interest rates effectively to zero and has created a broad range of lending facilities to ensure that banks can remain above water despite massive losses from mortgages and other consumer loans.
Bernanke said the U.S. central bank will definitely reverse its monetary policy at some stage to prevent inflation.
The Fed will "make sure we do raise rates at an appropriate time and make sure we don't leave rates too low for too long, because it can have adverse effects, at least on inflation," Bernanke said in response to questions.
Likewise, said some of the Fed's programs aimed at boosting lending may one day have to be removed in order to prevent the stimulus from building into an outright threat of inflation.
"We have a number of effective tools that will allow us to drain excess liquidity and begin to raise rates at the appropriate time," Bernanke said. "That said, unwinding or scaling down some of our special lending programs will almost certainly have to be part of our strategy for removing policy stimulus once the recovery is under way."
In the meantime, Bernanke said the Fed was exploring an expansion of the types of credit made available through its program to restart securitization markets, the Term Asset-Backed Securities Lending Facility, or TALF.
Bernanke did not specify what areas were under consideration, but authorities have said the program may expand to include commercial mortgage-backed securities and older securities, rather than only recently issued ones.
Response to TALF so far has been lukewarm. While the central bank had allotted $200 billion in loans, only about $6.4 billion in deals have emerged in two auctions thus far.
Bernanke took pains to justify actions taken to save insurance giant American International Group , which has been embroiled in a controversy over lavish bonuses paid after the firm had already received $180 billion in taxpayer aid.
He argued that the firm's collapse would have compromised the entire global financial system.
Nonetheless, he argued that direct support to financial institutions and loans to investors would not compromise the taxpayer, or lead to the threat of inflation.
"I can assure you that monetary policy-makers are fully committed to acting as needed to withdraw on a timely basis the extraordinary support now being provided to the economy, and we are confident in our ability to do so," Bernanke said.
He also said the U.S. dollar remains the main currency of reserve holding and international transactions.
"The dollar remains the dominant currency in terms of reserve holdings and in terms of international transactions. That situation has not changed and I really don't see any prospects of it changing in the foreseeable future," Bernanke said in response to a question.
"But it is important for us to make sure that the dollar stays strong and the best way to make the dollar strong is to take policy actions that will allow the U.S. economy to have a strong recovery."
(Writing by Pedro Nicolaci da Costa in New York and Mark Felsenthal in Washington; Editing by Chizu Nomiyama and Leslie Adler)