Bernanke defends new Fed plan to aid economy

WASHINGTON (AP) - Worries are overblown that the Federal Reserve's plan to aid the economy could unleash inflation, Chairman Ben Bernanke said.

Bernanke's comments come hours after the Fed announced Wednesday that it will buy $600 billion worth of government bonds in a bold bid to make loans cheaper, spur spending and invigorate the economy.

Critics, including some Fed officials, fear that all the money being injected into the economy could ignite inflation or speculative bubbles in the prices of bonds or commodities. Bernanke said those inflation fears are "overstated." A larger $1.7 trillion program launched during the financial crisis didn't result in higher inflation, he pointed out. When the economy is on firm footing, Bernanke expressed confidence that the Fed will be able to smoothly soak up all that money without harming the economy.

Bernanke revealed his thoughts in an opinion piece scheduled to be published Thursday in the Washington Post.

The Fed needs to take the action because unemployment is too high and inflation is too low, signs of a still-troubled economy, Bernanke explained.

"We could hardly be satisfied," the Fed chief said.

The unemployment rate stands at 9.6 percent. It's been at least 9.5 percent for 14 months, the longest stretch since the Great Depression.

The "slack" in the economy - factories running below capacity and companies limiting hiring - has kept inflation historically low.

In the 12 months that ended in September, consumer prices rose just 1.1 percent. Bernanke has said the Fed would like to see inflation closer to 2 percent to show the economy is making a solid recovery.

The Fed's action on Wednesday also is aimed at nipping any deflationary forces in the bud.

"In the most extreme case, very low inflation can morph into deflation (falling prices and wages), which contribute to long periods of economic stagnation," Bernanke said.

Deflation is a widespread drop in prices, wages and the values of homes and stocks. It can cause people to delay purchases because they feel they can buy later at lower prices. Falling incomes also make it harder to pay debts. Foreclosures rise. So do bankruptcies. Once it takes hold, deflation is hard for policymakers to break. Deflation contributed to Japan's "lost decade" of the 1990s, and the country is still battling it.

"With unemployment high and inflation low, further support to the economy is needed," Bernanke said.