July 18 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the central bank if necessary will act to combat too-low inflation, seeking to avert potential damage to the economy and any threat of a broad-based decline in prices.
"The committee is certainly aware that very low inflation poses risks to economic performance -- for example by raising the real cost of capital investment -- and increases the risk of outright deflation," Bernanke said in testimony prepared for the Senate Banking Committee, repeating comments he made yesterday to a House panel. "We will act as needed to ensure that inflation moves back toward our 2 percent objective over time."
Fed officials, debating the possible timing for a reduction in $85 billion in monthly bond buying, may have more leeway to continue their purchases as price gains slow. Inflation as measured by the personal consumption expenditures price index, the Fed’s preferred gauge of price increases, rose 1 percent in May from a year earlier, near the lowest level in almost four years.
Monetary policy will remain "highly accommodative" for the foreseeable future amid unemployment that is "high and declining only gradually," Bernanke said in the second day of his semi-annual testimony to Congress. The U.S. added 195,000 jobs in June and the jobless rate remained at 7.6 percent.
"With inflation subdued, we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized," he said, reiterating his comments to the House Financial Services Committee.
The Federal Open Market Committee is next scheduled to meet July 30-31.
Bernanke’s testimony may be his last, as his second four- year term expires Jan. 31. While Bernanke, 59, hasn’t described his plans, President Barack Obama said in June the Fed chief stayed in his post "longer than he wanted."
--Editors: James L Tyson, Mark Rohner
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