Ben Bernanke, head of the US Federal Reserve, has defended the central bank’s policy in addressing the recession, including its stimulus plan.

Testifying before the House Financial Committee in his twice-yearly report on monetary policy, he said the focus was to foster "economic recovery".

He sought to reassure markets that government intervention could be withdrawn in a "smooth and timely" way.

Interest rates were likely to remain low for some time, he added.

He said economic conditions meant rates would be kept at exceptionally low levels for "an extended period", between 0% and 0.25%.

‘Persuaded’

Congress approved a $787bn economic stimulus plan in February, aimed at saving or creating 3.5 million jobs and encouraging consumer spending and rebuilding infrastructure.

The plan included tax breaks and money for social programmes.

"Although the recession in the rest of the world led to a steep drop in the demand for US exports, this drag on our economy appears to be waning"

Ben Bernanke, chairman, US Federal Reserve

"It is important to assure 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that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as possible," said Mr Bernanke.

Barney Frank, the head of the committee highlighted concerns over inflation. "If people think there’s going to be inflation, then that’s inflationary."

He said Mr Bernanke had addressed such concerns, adding that he was "persuaded by the chairman and others that we are able, in an orderly way, to undo what we had to do so that there will not be that inflationary impact".

Analyst Hugh Johnson, chief investment officer at Johnson Illington Advisors, said Mr Bernanke’s remarks showed that if the job market improved, the Fed would not hesitate in changing its policy.

The Fed is saying it has "the tools for preserving price stability, which effectively means that they have the tools to reduce the levels of liquidity in the financial system before inflation takes hold", said Mr Johnson.

Recovery

Mr Bernanke cited signs that the financial markets had improved, and so had the US economy.

"Although the recession in the rest of the world led to a steep drop in the demand for US exports, this drag on our economy appears to be waning," he said.

However, he cautioned that the unemployment rate remained high and job insecurity, coupled with a fall in home values and limited credit, meant gains in consumer spending would be restricted.

Looking ahead, Mr Bernanke said the central bank expected output to improve in slightly in the rest 2009, with 2010 seeing a gradual recovery.

Rudy Narvas, an analyst at 4Cast in New York, said: "[Mr Bernanke] is still pretty dovish on the economy. He still believes that slack is going to remain at least through 2011."

But he added: "He is saying that they can raise rates even though the unwinding of the balance sheet hasn’t finished yet, which is kind of important, because it suggests to us that they could begin raising rates by as early as 2011."</p

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