US Fed chief Bernanke warns against premature policy tightening

WASHINGTON (AFP) - US Federal Reserve Chairman Ben Bernanke acknowledged the risks of the Fed's low interest-rate policy on Wednesday but warned that tightening policy now could stall the US recovery.

Mr Bernanke said in a statement to Congress that US economic growth continues at a moderate pace and, despite a slump in prices in the past two months that has sparked some fears of deflation, the Fed still sees inflation running at or below the the central bank's two per cent target rate.

On the other hand, he pointed to continued weaknesses in the economy, especially high joblessness and the drag on growth of federal spending cuts.

Such weaknesses justify the Fed's aggressive bond-purchase policy aimed at keeping longer-term interest rates low, he said.

"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," Mr Bernanke told Congress's Joint Economic Committee.

The Fed's policy board, the Federal Open Market Committee, he said, "is aware that a long period of low interest rates has costs and risks".

"Recognising the drawbacks of persistently low rates, the FOMC actively seeks economic conditions consistent with sustainably higher interest rates," he said.

"Unfortunately, withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions."