Bernanke defends Fed actions, vows to do 'everything possible'

WASHINGTON -- Federal Reserve Chairman Ben Bernanke said Wednesday that recent economic data have been "dismal," as many nations have fallen into recession; emphasized that he expects inflation to remain "quite low" for some time; and reiterated the Fed's determination to do "everything possible within the limits of its authority" to repair the battered economy.

In a speech prepared for the National Press Club, Bernanke defended recent, historic Fed actions to bail out troubled institutions like insurance giant American International Group, and to create extraordinary lending programs to backstop the commercial paper, money market mutual fund and mortgage markets.

The central bank's balance sheet, its ledger of assets and liabilities, has ballooned from $800 billion to about $2 trillion in recent months as it has aggressively intervened in select credit markets.

Some economists have warned that the expansionary Fed policies create the risk of stoking inflation down the line when the economy recovers. Members of Congress have complained that the central bank has not provided adequate information about the risks it is taking on, and the specific assets it has taken as collateral from institutions like former investment bank Bear Stearns and AIG.

"At this point, with global economic activity weak and commodity prices at low levels, we see little risk of unacceptably high inflation in the near term; indeed, we expect inflation to be quite low for some time," Bernanke said.

Bernanke also said the central bank, starting later Wednesday, would begin issuing longer-term projections for economic growth and inflation. The announcement is one part of an evolving Fed strategy to reassure the markets and consumers that the Fed will not let inflation fall too far at a time when there is growing concern about the possibility of deflation — a widespread, sustained fall in prices that can further harm the economy.

The Fed chairman said that when the economy and credit markets do begin to recover, the central bank will have to "unwind" its lending programs. To a certain extent, the process will happen automatically as financial firms no longer need its services. Other programs, which the Fed is legally allowed to offer only under unusual and exigent circumstances will have to be halted. The Fed may also work with the Treasury Department to offer special financing tools to help whittle down the Fed balance sheet.