Central banks may need to burst bubbles: Bernanke

Federal Reserve Chairman Ben Bernanke speaks at the Boston Federal Reserve Bank in Boston, Massachusetts October 18, 2011.

BOSTON (Reuters) - Federal Reserve Chairman Ben Bernanke said on Tuesday that central banks may need to resort to monetary policy to combat asset bubbles, although regulation should be a first line of defense.

"The possibility that monetary policy could be used directly to support financial stability goals, at least on the margin, should not be ruled out," he said at a conference at the Boston Federal Reserve Bank.

Bernanke did not directly discuss the outlook for the U.S. economy or monetary policy in his speech, which offered thoughts about how central banking might shift in the wake of the financial crisis.

The crisis has brought the goal of financial stability into co-equal status with macroeconomic health as a central banking goal, elevating the importance of regulation to guard against systemic risks, Bernanke said.

However, he said it was too soon to say how effective regulation would be in warding off financial imbalances.

As for monetary policy, he said it was unlikely central banks would move away from the current focus on so-called flexible inflation targeting, in which they make clear their inflation goals as a way of ensuring the public's expectations of inflation remain low.

Bernanke said that in the United States, policymakers were still striving to refine their communications. "The (Fed) continues to explore ways to further increase transparency about its forecasts and plans," he said.

To help spur stronger growth, the Fed is considering ways to assure financial markets it won't tighten financial conditions any time soon.

It has already said it expects financial conditions will warrant extremely low interest rates at least through the middle of 2013, and officials are discussing setting explicit goals for inflation and unemployment.

Despite an aggressive easing of monetary policy by the Fed, the U.S. economy continues to suffer from the effects of a burst real estate bubble.

Economists have long debated whether central banks should prick perceived asset bubbles when they are forming.

Before the financial crisis, most central bankers, Bernanke included, argued against using interest rates to lean against bubbles.

While those views have softened, Bernanke said regulation, supervision and monitoring would remain "the first line of defense" against the threat of financial instability.

"The evolving consensus ... is that monetary policy is too blunt a tool to be routinely used to address possible financial imbalances," he said.

(Reporting by Kristina Cooke; Writing by Mark Felsenthal; Editing by James Dalgleish)