Bernanke sees tighter policies

Bernanke made clear that policymakers were thinking how to terminate support.

The US Federal Reserve must continue to prop up the economy for an extended period but can8217;t do so indefinitely for fear of triggering an inflationary surge,Federal Reserve Chairman Ben Bernanke warned on Thursday.

The US central bank has cut interest rates to near zero per cent and pumped hundreds of billions of dollars into the financial system to counter the worst financial crisis since the Great Depression.

At a Fed conference,where he discussed the central bank8217;s ballooning balance sheet,Bernanke made clear that policymakers were thinking how to terminate support as recovery sets in.

8220;Accommodative policies will likely be warranted for an extended period,8221; Bernanke told participants at the conference held in the Fed8217;s headquarters.

8220;At some point,however,as economic recovery takes hold,we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.8221;

Bernanke sent a signal the Fed is gradually but steadily moving toward an exit from its supportive policies,even while evidence of the recovery has been mixed.

A report last week showing that US employers shed more jobs than expected in September dented confidence in the recovery. But data released on Thursday showed gains in retail sales and a nine-month low in unemployment claims reinvigorated optimism.

TOO LOW FOR TOO LONG

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The dollar inched up from 14-month lows against a basket of currencies after Bernanke8217;s comments,while his Fed colleague,Kansas City Fed President Thomas Hoenig,also warned of the perils of leaving rates too low for too long.

8220;I don8217;t believe necessarily an indefinite period of very accommodative policy is in the long-run best interests of the country,8221; he told an economic forum hosted by his bank in Oklahoma City.

8220;If you leave it at zero for too long a period,then we will have other issues,8221; said Hoenig,who is seen as one of the more hawkish,or anti-inflation members of the Fed8217;s policy-setting committee,where he will be a voter next year.

The dollar has been under pressure as the US economy has lagged some other economies in recovering from a crisis that reverberated around the world.

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On Tuesday,Australia became the first of the Group of 20 big industrialized and developing economies to increase borrowing costs,saying that the worst danger for the economy had passed.

Hoenig,asked by the audience about the Australian central bank8217;s decision,said this reflected the better performance of the country8217;s economy.

In the United States,most analysts do not see the Fed raising rates until the middle of next year.