If inflation were to accelerate, the Fed would have to raise rates to slow borrowing and spending and blunt price increases. Hiring might then slow.
Speaking at a news conference with reporters, Bernanke sketched a picture of an economy growing steadily but still weighed down by a prolonged period of unemployment, now at 8.8 percent. He acknowledged the pain that is causing, noting that around 45 percent of the unemployed have been without a job for six months or longer.
“We know the consequences of that can be very distressing because people who are out of work for a long time, their skills tend to atrophy,” Bernanke said.
But he added: “It’s not clear that we can get substantial improvements in payrolls without some additional inflation risks, and in my view we can’t achieve a sustainable recovery without keeping inflation under control.”
The news conference was the first time in the Fed’s 98-year history that a chairman has begun holding regular sessions with reporters.
Bernanke appeared relaxed with reporters, projecting a calming presence and saying nothing that might rattle investors.
The Fed chairman offered some clues about when and how the Fed would begin raising interest rates.
For more than two years, the Fed has kept a pledge to hold its key rate at a record low near zero for an “extended period.” At his news conference Wednesday, Bernanke said that at this point, that phrase means “a couple of meetings.” The Fed, which ended a two-day meeting Wednesday, gathers about every six weeks.
Once the Fed abandons the “extended period” language, it would be viewed as a signal that it was preparing to start boosting interest rates.
Stocks rose after Bernanke said he expects the economy to continue growing through next year and 2013. The Dow Jones industrial average, which was up about 50 points when Bernanke began speaking, gained another 50 points half an hour before the market closed.
Bernanke acknowledged that higher gasoline prices are creating a financial hardship for many Americans. But he said the Fed doesn’t think gas prices will continue to rise at their recent pace.
The news conference offered Bernanke a chance to drive a debate about Fed policy. Critics have said the Fed’s efforts to boost growth raise the risk of high inflation. Investors are seeking clues about when the Fed will start raising interest rates to help slow price increases.
Bernanke said the first step in tightening interest-rate policy could occur when the Fed stops reinvesting the proceeds of its bond holdings. Bernanke would not be specific about when that might occur. He said it will depend on inflation and economic growth in coming months.
He said that step would be a relatively modest one. But it would constitute the Fed’s first tightening because it would allow interest rates to creep up.
The news conference, the first of three scheduled this year, is part of a long-standing Bernanke effort to make the Fed more transparent.