Associated Press | Federal Reserve Chairman Ben Bernanke told
Congress Wednesday that record-low interest rates are still needed to
ensure that the economic recovery will last and to help cushion the
sting of high unemployment.

In prepared remarks for his twice-a-year report to the House Financial
Services Committee, Bernanke struck a confident tone that the recovery
should endure. But he also sought to tamp down expectations.

Federal Reserve Chairman Ben Bernanke testifies on Capitol Hill today on the state of the economy. (AP Photo/Manuel Balce Ceneta)

The moderate economic growth the Fed expects will lead to only a slow decline in the nation’s nearly double-digit unemployment rate, he said.

He offered no new clues about the timing of an interest rate increase. Most economists think it is months away. Bernanke said rates will need to stay at exceptionally low levels for an extended period “as the expansion matures.”

Bernanke is likely to face more pressure than usual from lawmakers in an election year. Their constituents are struggling economically, while bailed-out Wall Street banks are profitable again. Unemployment stands at 9.7 percent, home foreclosures are at record highs and individuals and businesses are having trouble getting loans.

The Fed chairman reiterated a pledge that the Fed will keep its main interest rate at an all-time low near zero for an “extended period.” The target range for Fed’s main rate, the federal funds rate, has been between zero and 0.25 percent since December 2008.

At the same time, Bernanke sought to stress that when the economy is on firmer footing and the Fed needs to reverse course and tighten credit for millions of Americans, he will do so.

Deciding when to boost rates will be the next big challenge facing Bernanke. Boosting rates too soon could derail the recovery. But waiting too long could trigger inflation and feed a speculative asset bubble. That, too, could threaten the economy, along with Americans’ pocketbooks and nest eggs.

Bernanke would only say that “at some point,” the Fed will need to move to tighten credit. When it does, Bernanke sketched out the Fed’s strategy, first unveiled on Feb. 10, for doing so.

He said the Fed is likely to boost the rate it pays banks on money they leave at the Fed, which would mark a shift away from the funds rate, the Fed’s main tool since the 1980s. A bump-up in the interest rate on bank reserves, though, would ripple though the economy in much the same way an increase in the funds rates does. Consumer and businesses borrowers would have to pay more for loans.

With financial conditions improving, the Fed has been able to wind down most of its special lending programs for banks and others set up during the crisis.

One key economic revival program that has lowered mortgage rates and bolstered the housing market is slated to end on March 31. The Fed is on track to complete buying $1.25 trillion worth of mortgage securities from Fannie Mae and Freddie Mac at that time, and another $175 billion worth of debt from them.

Bernanke continued to leave the door open to a possible extension of the program if the economy were to take a turn for the worse.