WASHINGTON The U.S. Federal Reserve should give the economy the stimulus it needs despite "credible" worries that its aggressive bond-buying program could destabilize the financial system, Fed Chairman Ben Bernanke said on Thursday.
In his last planned public remarks as head of the central bank, Bernanke said concern about the potential harm to financial stability is the only risk from unconventional monetary policies "that I find personally credible."
But, he added "at this point we don't think that - and I think I can speak for my colleagues on this - we don't think that financial stability concerns should at this point detract from the need for monetary policy accommodation, which we are continuing to provide," Bernanke said.
Bernanke, who took the helm at the U.S. central bank eight years ago, has staked his legacy on an aggressive response to the Great Recession. His departing comments suggest that while the Fed is increasingly aware of harmful side-effects, it is in no rush to tighten policies soon.
During his tenure, Bernanke pushed the Fed far into unconventional territory, not only slashing short-term interest rates to zero and keeping them there since December 2008, but providing long-term "forward guidance" assuring investors the Fed would keep rates low for a long time to come.
In a second unprecedented move, he quadrupled the Fed's balance sheet to $4 trillion through three rounds of bond-buying aimed at lowering long-term rates and spurring hiring.
"I do think by the way that they both have been helpful," Bernanke said at a Brookings Institution event. And neither, he said, have delivered the potential costs that many warned they would, including unbridled inflation.
Inflation, by the Fed's preferred gauge, has risen just 1.1 percent in the past 12 months, well below the Fed's 2-percent target.
Critics, including some U.S. lawmakers and hawkish Fed policymakers, have warned that the huge amount of money-printing could inflate asset-price bubbles in risky and hard-to-detect corners of financial markets such as in leveraged loans.
But Bernanke stood by his conviction that policies should be focused primarily on meeting the Fed's mandate of low unemployment and stable prices.
"Our strategy ... has been to not distort monetary policy in order to address those risks directly," he said of possible financial instabilities.
Speaking at the same event, San Francisco Fed President John Williams said regulatory measures, rather than monetary policy, should be the first line of defense against potential bubbles. Yet he said policymakers needed to keep "open minds" about the possibility that they are inflating asset prices.
Janet Yellen, currently Fed vice chair, will take the reins as Fed chair on February 1, just after the Fed's first policy-setting meeting of the year.
Last month, the Fed took a first step toward dialing down its massive stimulus with a decision to reduce monthly purchases of Treasuries and mortgage-backed securities to $75 billion from $85 billion a month.
The Fed will probably phase the program out entirely late in the year, Bernanke said at the time. Despite some internal resistance, Bernanke said on Thursday he did not think "a large number" of fellow Fed policymakers feel that bond-buying is "inherently not effective."
He also told investors that the Fed was nowhere near to tightening policy, saying the U.S. central bank would keep rates near zero until "well past the time" that unemployment falls to 6.5 percent, especially if inflation continues to linger below the Fed's 2-percent target.
Unemployment fell to 6.7 percent in December, sharply down from the 10 percent recession-era peak in 2009.
Bernanke, an expert scholar in the Great Depression of the 1930s, has aimed the Fed's ultra-easy policies at getting more Americans back to work.
Asked whether he had sleepless nights during the depths of the financial crisis in late 2008, he said: "Oh sure, absolutely."
"I was so absorbed on what was happening, and trying to find a response to it, that I wasn't really in that kind of reflective mode," he told the audience, which included former Bank of Israel chief Stanley Fischer, who taught Bernanke at MIT and who is set to become the Fed's next vice chair.
"Later on," Bernanke added, "I was kind of like, if you're in a car wreck or something, you're mostly involved in trying to avoid going off the bridge, and then later on you say, oh my god."
Yet while the Fed's emergency actions likely avoided a far deeper recession, the central bank has since absorbed much criticism from politicians who say its policies have been reckless.
"We hope that as the economy improves and as we tell our story ... that people will appreciate and understand that what we did was necessary," Bernanke said, "that it was in the interest of the broader public, that it was a Main Street set of actions aimed at helping the average American."
(Additional reporting and writing by Ann Saphir; Editing by James Dalgleish and Paul Simao)