Ben Bernanke says raising US interest rates early risks economic growth

Federal Reserve chairman Ben Bernanke signalled he would keep the Fed's target interest rate low to support the economy, even as some colleagues warned the policy risks triggering financial market instability.

"Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading - ironically enough - to an even longer period of low long-term rates," Bernanke (pictured) said on Friday in a speech in San Francisco. "Only a strong economy can deliver persistently high real returns to savers and investors."

Bernanke in congressional testimony last week defended the Fed's US$85 billion in monthly bond purchases, saying the benefits of reducing borrowing costs and fuelling growth outweighed any potential costs.

The Federal Open Market Committee is debating when to curtail the bond-buying amid concern the stimulus may encourage asset-price bubbles and complicate the Fed's eventual reduction of its US$3.09 trillion balance sheet.

The Fed chairman said in response to audience questions that "monetary policy can be a relatively blunt tool for addressing problems in a given market". He cited the Fed's attempt in the 1920s to raise rates to blunt a stock market boom, and the subsequent Great Depression, to warn of the risks from using interest rates to restrain financial markets.

Bernanke said the central bank seeks to avoid causing disruptions by holding at 0.25 per cent the interest rate it pays on reserves that banks keep at the Fed. He said he had "concerns on the effects of functioning of markets" if the Fed cut the rate to zero.