By Mark Felsenthal
WASHINGTON (Reuters) - The U.S. Federal Reserve believes the extraordinary programs aimed at stabilizing credit and banking have improved market conditions and eased strains despite a drumbeat of negative economic news, Fed Chairman Ben Bernanke said on Tuesday.
"We have been encouraged by the responses to these programs," Bernanke said in testimony to the House of Representatives Financial Services Committee.
Bernanke defended the Fed's actions to lawmakers who worried that the U.S. central bank had overstepped with lending programs, which have flooded financial markets with money, in an effort to pull the financial sector out of the deepest crisis since the Great Depression.
Aggressive responses by the Fed and other central banks to the financial crisis of the last 18 months have helped reduce interbank lending rates internationally and taken some of the steam out of liquidity pressures at the end of 2008, he said.
Lawmakers at the hearing expressed concern about the Fed's use of emergency powers and disclosure of information surrounding special lending facilities.
"Going forward ... it does not seem healthy to me in our democracy for the amount of power that is now lodged in the Federal Reserve with very few restrictions to continue," Committee Chairman Barney Frank said.
However, Frank, a Massachusetts Democrat, added he believes the Fed has used its authority responsibly in the crisis.
Fed officials are considering providing the public with more information about the central bank's balance sheet and lending policies, Bernanke said.
The Fed has more than doubled its balance sheet to greater than $1.8 trillion since the middle of last year as it has pumped money into the financial system and propped up failing institutions.
Bernanke acknowledged the expansion of the Fed's balance sheet could expose the economy to inflation risks if the central bank fails to withdraw liquidity measures when the economy recovers. Policy-makers were paying close attention in an effort to minimize that risk, he said.
"That's one of the chief things we look at, at our (Fed) meetings," Bernanke said in response to questions. "We want to be sure that when the time comes we will be able to tighten appropriately to make sure that inflation does not become a problem," he added.
Earlier on Tuesday, the Fed announced it would expand a program aimed at supporting consumer lending to $1 trillion from $200 billion as part of the Obama administration's initiative to rescue the banking sector.
Bernanke played down credit risks from the expanded balance sheet, telling the panel that 95 percent of the Fed's lending, worth about $1.9 trillion, is "extremely safe." The remainder of the Fed's lending linked to its propping up of investment bank Bear Stearns and insurer American International Group is "a bit less secure," but not likely to lose money, he added.
Bernanke said the Fed has deployed emergency authorities not used since the 1930s to stabilize markets. As the situation improves, the Fed will unwind those programs, he said.
The Fed has chopped interest rates to near zero to help pull the economy out of deep recession. Bernanke said continued strong actions are necessary to restore confidence.
"At this point the reason the banks and the credit markets are frozen is no longer the legacy subprime mortgages and those things; it's more a concern about where the economy is going," he said.
(Reporting by Mark Felsenthal; Editing by Chizu Nomiyama)
