The Fed's key bank lending rate is now at a record low near zero and will probably stay there for an "extended period," Bernanke said in prepared remarks to a Fed conference here.
That echoed the pledge he and his colleagues made at their meeting in late September. The goal: super-low rates will entice people and businesses to spend more, nurturing the budding recovery.
In a surprise move earlier this week, Australia's central bank raised rates, the first nation in the Group of 20 countries to do so. The move raised questions about which country would be next.
Although Bernanke has previously said the United States is likely out of recession, he has warned that the recovery won't be robust enough to prevent the unemployment rate now at a 26-year high of 9.8 percent from rising. It is expected to top 10 percent this year, and rise as high as around 10.5 percent in the middle of next year before slowly drifting downward.
Still, Bernanke made clear on Thursday that when the time is right the Fed will have the tools and the political will to reel in the unprecedented amount of money it has pumped into the economy to avoid unleashing inflation.
"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," Bernanke said.
The Fed chief laid out some more details about how the central bank would sop up the money.
Besides boosting its key bank lending rate, the Fed can raise the rate it pays banks on reserve balances held at the central bank, Bernanke said. That would give banks an incentive to keep their money parked there, rather than having it flow back into the economy, where it can stoke inflationary pressures. The Fed also can set up the equivalent of certificates of deposit for banks at the central bank, another incentive for banks to keep their money at the Fed.
The Fed also can drain money from the financial system by selling securities from its portfolio with an agreement to buy them back at a later date, Bernanke said. Such large-scale "reverse repurchase agreements" can be done with banks, Fannie Mae and Freddie Mac and other institutions, he said. Some analysts have said that might involve transactions with money market mutual funds. Or the Fed can sell a portion of its securities outright.
"Overall the Federal Reserve has a wide range of tools for tightening monetary policy when the economic outlook requires us to do so," Bernanke said. "We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability," he added.
It's sure to be a high-wire act for the Fed. Tightening too soon could short-circuit the recovery. Waiting too long could ignite inflation.
The Fed's balance sheet has ballooned to $2.1 trillion, reflecting the creation of a spate of lending programs intended to ease the financial crisis. That's more than double before the crisis struck.
As the crisis has eased, so has demand for some of the Fed's lending programs.
Short-term lending, which hit $1.1 trillion at the end of last year, when the crisis was still mounting, has fallen to about $264 billion, a drop of more than 75 percent since the turn of the year, Bernanke said.
"We expect this trend to continue as markets improve," he said.
Demand for another "commercial paper" program that provides companies with short-term financing needed to pay for salaries and supplies also has declined sharply, from $334 billion at the turn of the year to less than $50 billion currently, Bernanke said.
Meanwhile, the Fed is on track to wrap up this month a $300 billion program to buy government debt. That program aims to lower rates for mortgages and other consumer debt, the Fed chief said.
The Fed also is buying $1.25 trillion worth of mortgage-backed securities, in another move to force down mortgage rates. Bernanke said both programs appear to be having their "intended effect."
The Fed chief once again expressed his displeasure at last year's rescue of insurance giant American International Group and the Fed's financial backing of JPMorgan's takeover of Bear Stearns. Those operations were taken "with great discomfort," Bernanke said.