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Jakarta, Financeroll.com – Federal Reserve Chairman Ben S. Bernanke said the central bank must retain the flexibility to withdraw its record injection of credit into the economy to keep inflation in check when the crisis abates.


The central bank’s emergency “activities must not constrain the exercise of monetary policy as needed to meet our congressional mandate to foster maximum sustainable employment and stable prices,” Bernanke said in the text of a speech in Charlotte, North Carolina. The U.S. central bank has effectively printed money to buy or lend against a range of assets to alleviate the credit crunch and revive the economy. Bernanke’s speech today detailed steps that the Fed can take to remove that liquidity.

Bernanke also rebuffed criticism from some analysts that the Fed is favoring some credit markets over others in the emergency programs it has set up in the past six months. The Fed chief hailed a decline in home-loan rates in the wake of the central bank’s purchases of mortgage securities, and said the drop may help improve the housing market.

The central bank has expanded its balance sheet by $1.2 trillion over the past year, taking on assets including mortgage securities, corporate debt and now long-term Treasuries under the Fed’s latest policy decision last month. The Fed’s Open Market Committee decided to buy as much as $300 billion of long-term Treasuries after a split between some officials over how best to ease the credit crunch.

Bernanke said that the Fed’s lending for purchases of commercial paper and securities backed by consumer and business loans don’t mean it’s engaging in “credit allocation.” He said “our programs have been aimed at improving financial and credit conditions broadly.”

The Fed’s tools for raising short-term interest rates once the crisis wanes include unwinding the emergency-loan programs, conducting reverse repurchase agreements against long-term securities holdings and increasing the rate the Fed pays on bank reserves, Bernanke said. The emergency programs were designed to be “unwound as markets and the economy revive.”

Bernanke reiterated that the Fed and Treasury are seeking unspecified legislation to give the Fed “additional tools for managing bank reserves.” San Francisco Fed President Janet Yellen said last month that the central bank wants authority to issue its own debt.

Bernanke said the Fed expects to be “fully repaid” on loans made in connection with the bailouts of Bear Stearns Cos. and American International Group Inc. “From a credit perspective, these support facilities carry more risk than traditional central bank liquidity support, but we nevertheless expect to be fully repaid,” Bernanke said.