He said the central bank will reduce the stimulus package by removing some cash from the financial system and then raising interest rates. The cuts will not be implemented for some time but the statement was the clearest indication to date of the Fed’s exit strategy.
The news spooked markets in the US and beyond, amid fears an increase in interest rates could curb consumer spending and break the fragile economic recovery.
Bernanke’s comments were due to be read to the House of Representatives Financial Services Committee but heavy snow in Washington caused the event to be postponed.
They read: “Although at present the US economy continues to require the support of highly accomodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding.
“We have spent considerable effort in developing the tools we will need to remove policy accomodation, and we are fully confident that at the appropriate time we will be able to do so effectively.”
The central bank has pumped more that $1 trillion (£640bn) into the US economy, after cutting interest rates to close to zero in the wake of the financial meltdown.