Bernanke: Record-low rates still needed

February 25, 2010 at 12:00a.m.

WASHINGTON (AP) — Federal Reserve Chairman Ben Bernanke told Congress on Wednesday that record-low interest rates are still needed to ensure that the economic recovery will last and to help ease the sting of high unemployment.

In 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.

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.”

Investors seemed buoyed by Bernanke’s commitment to low rates. The Dow Jones industrial average rose 92 points. The stock pickup came despite a government report showing sales of new homes fell to a record low in January.

Bernanke is facing 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.

“Getting people back to work — socially, most of all, but also for the overall economy” — is critical, said the committee’s chairman, Rep. Barney Frank, D-Mass.

To help make that happen, the Senate passed a bill Wednesday aimed at spurring job creation. The legislation would give tax breaks to businesses that hire the unemployed.

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.