Chairman Ben Bernanke has offered a wide-ranging defence of the Federal Reserve's bold policies to stimulate the still-weak US economy.
The Fed needs to drive down borrowing rates because the economy isn't growing fast enough to reduce high unemployment, Bernanke said in a speech to the Economic Club of Indiana on Monday. The unemployment rate is 8.1 per cent.
Low rates could also help shrink the federal budget deficit by easing the government's borrowing costs and generating tax revenue from stronger growth, Bernanke argued.
The chairman cautioned Congress against adopting a law that would allow it to review the Fed's interest rate policy discussions. The House has passed legislation to give Congress' investigative arm broader authority to audit the Fed, including reviewing its interest rate policymaking. The Senate hasn't adopted the bill.
Bernanke warned that such a step would improperly inject political pressure into the Fed's private deliberations and make officials less likely to act.
His speech follows the Fed's decision at its September 12-13 meeting to launch a new mortgage-buying program to try to help boost the housing market, spur hiring and accelerate economic growth. The Fed said it would keep buying the bonds until the job market showed substantial improvement. It also decided to keep its benchmark short-term interest rate near zero through at least mid-2015.
In his speech, Bernanke sought to reassure investors that the timetable for keeping rates low "doesn't mean we expect the economy to be weak through 2015". Rather, he said the Fed expects to keep rates low well after the economy strengthens.
Bernanke spoke two days before President Barack Obama and Republican challenger Mitt Romney are to hold a debate in which the economy is the central theme. And on Friday, the government will release its September jobs report. Economists expect only modest hiring gains and continued unemployment above eight per cent.
The US economy is struggling more than three years after the Great Recession ended. High unemployment and weak pay growth have made consumers more cautious about spending, which has hurt manufacturing and slowed broader growth.
Bernanke reiterated his argument that lower rates boost growth by helping increase prices of stocks, homes and other assets. That, in turn, increases household wealth and tends to make consumers and businesses more willing to spend.
Bernanke noted that when the Fed launched its first round of bond buying in late 2008, the average rate on a 30-year fixed-rate mortgage was a little above six per cent. Today, the rate is 3.49 per cent, the lowest since long-term mortgages began in the 1950s.
Still, the job market's recovery remains slow, in part because many Americans lack the credit to qualify for a mortgage or can't afford the larger down payments now required.