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Bernanke warns against scaling back Fed stimulus too soon

WASHINGTON -- Federal Reserve Chairman Ben S. Bernanke said Wednesday that the central bank could start scaling back its stimulus program in the next few months, but warned against acting too quickly and harming the still-weak economic recovery.

The key for Fed policymakers would be a belief that the jobs market is strong enough to get the unemployment rate back toward a more normal level, he said.

"We’re trying to make an assessment of whether or not we’ve seen real and sustainable progress in the labor market outlook," Bernanke told Congress' Joint Economic Committee.

"If we see continued improvement and we have confidence that’s going to be sustained," then central bank policymakers could start scaling back the bond-buying stimulus program "in the next few meetings."

The policymaking Federal Open Market Committee meets again in June and monthly through October.

Bernanke said the economy was improving despite the "fiscal headwinds" caused by automatic federal spending cuts and the European recession. 

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Economic growth has been moderate this year, with spending by consumers and businesses offsetting reductions in government spending, he said. A stronger housing market has helped fuel the growth over the past 12 months.

But although the job market has "shown some improvement recently," it still "remains weak overall," Bernanke said.

The unemployment rate was 7.5% in April, when the economy added 165,000 net new jobs.

Bernanke said Fed officials want to be careful not to start rolling back the stimulus program or raise near-zero short-term interest rates before the recovery is strong enough to handle it.

Critics have complained that the Fed's actions could fuel new asset bubbles and increase inflation, which continues to remain low. Low interest rates also hurt savers.

But Bernanke said reversing course too soon could have negative effects.

"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," he said.

Bernanke's comments about when the Fed might start scaling back its $85 billion a month in bond purchases is in line with those of another key Fed official.

William C. Dudley, president of the Federal Reserve Bank of New York, said in a Bloomberg TV interview that aired Wednesday that a decision on reducing the stimulus efforts still was three to four months away.


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