Federal Reserve Chairman Ben Bernanke sought to assure Wall Street and Congress Tuesday that the Fed will be able to reel in its extraordinary economic stimulus and prevent a flare up of inflation when the recovery is more firmly rooted.
Bernanke, in prepared testimony before the House Financial Services Committee, also said any such steps will be far off in the future and that the central bank's focus remains "fostering economic recovery."
To that end, he again pledged to keep its key bank lending rate at a record low near zero for an "extended period." Economists predict rates will stay at record lows through the rest of this year.
"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that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation," Bernanke said. "We are confident that we have the necessary tools to implement that strategy when appropriate."
But House Financial Services Committee Chairman Barney Frank, a Democrat, said it is important that the Fed not take those actions "prematurely" and snuff out a recovery.
Nigel Gault, economist at IHS Global Insight, said Bernanke wanted to send Congress a clear message: "Our monetary exit strategy is ready. Don't try to interfere with it."
Bernanke's term expires early next year, and President Barack Obama will have to decide whether to reappoint him. The Fed chief's innovative policies have been credited with pulling the economy from the edge of the abyss last year.
Wall Street messes
But those actions also have touched off criticism about putting taxpayers at risk and whether the government should be cleaning up Wall Street messes.
On Wall Street, bond investors took comfort in Bernanke's remarks, pushing Treasury prices higher. The Dow Jones industrial average added about 35 points in late trading, while broader indices dipped.
To revive the economy, the Fed has plowed trillions into the financial system in an effort to drive down rates on mortgages and other consumer debt. It also has created programs to bust through credit clogs, a key ingredient in turning the economy around.
Eventually, the Fed will need to soak up that money.
Bernanke also ran into skepticism from U.S. lawmakers wary of expanding the Fed's duties to police big financial companies. They argued that the Fed failed to spot problems that led to the financial crisis in the first place.
"The Fed has made some big mistakes," said the House panel's highest-ranking Republican, Spencer Bachus.
An Obama administration proposal to make the Fed the supercop of globally interconnected financial companies would be "just inviting a false sense of security that inevitably will be shattered at the expense of the taxpayer," Bachus warned.
Bernanke countered that the administration's proposal would be a "modest reorientation" of the Fed's powers, not a great expansion of them.
The Fed boss also worked to beat back an administration proposal to create a new consumer protection regulator for financial services and strip some of those duties from the central bank. The House panel delayed a committee vote on that legislation until September.
Consumer groups and lawmakers have blamed the Fed for failing to crack down early on dubious mortgages practices that fed the housing boom and figured into its collapse. Later this week, the Fed will issue a proposal to boost disclosures on mortgages and home equity lines of credit. It also will include new rules governing the compensation of mortgage originators.
Bernanke also argued against congressional proposals to let the Government Accountability Office, Congress' investigative arm, audit the central bank. He feared that audits that delve into the Fed's interest-rate decisions could compromise its independence in setting interest-rate policies.
"A perceived loss of monetary policy independence could raise fears about future inflation," he warned.
Rep. Ron Paul, a Republican and a frequent Fed critic, rejected that argument and said the Fed already makes political calculations.
"Just the fact that (the Fed) can issue a lot of loans and special privileges to banks and corporations," Paul said. "That's political."
Rep. Bill Posey, a Republican, who wants the Fed to be more open, argued that some people rightly say "you can find out more about the operations of the CIA, than the Fed. The public has the right to know."