Bernanke defends Fed record but hints at rate rises to come

BEN Bernanke staged a robust defence of the US Federal Reserve’s loose monetary policy in the years running up to the sub-prime crisis yesterday.

The Fed chairman argued that lax regulation rather than the low cost of borrowing was to blame for the American housing bubble that began to burst in 2006. Nonetheless, he hinted interest rates may have to be used more aggressively in the near future to curb excessive asset price rises.

Critics say the Fed’s policy of rock- bottom interest rates in the early 2000s fuelled the surge in house prices which precipitated the financial crisis. Many believe the Fed’s insistence on holding rates close to zero since December 2008 is already in danger of causing a fresh bubble.

But Bernanke said exotic new mortgages and irresponsible lending were behind the booming property market, factors he said pointed to the need for improved regulation.

Speaking at the American Economic Association’s annual meeting, Bernanke said: "However if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous build-ups of financial risks, we must remain open to using monetary policy as a supplementary tool."

He added: "We still have much to learn about how best to make monetary policy and to meet threats to financial stability in this new era." A hike in US interest rates would put the brakes on the healthy rally enjoyed by US stocks last year, which saw the S&P 500 end the year 23.5 per cent up. While many fund managers have complained of the "dash for trash" caused by huge injections of liquidity, bears warn that a rise in rates could stifle the recovery.