Chairman Ben S. Bernanke defended the Federal Reserve'sunprecedented bond buying in his first comments since the Fedrenewed the purchases last month, saying the program will spurgrowth, cut unemployment, help savers and support the dollar.

The central bank will sustain record stimulus even after theexpansion gains strength, and policy makers don't expect theeconomy to remain weak through 2015, Bernanke said today in aspeech in Indianapolis. The U.S. probably won't fall back into arecession even with growth too weak to reduce a jobless rate stuckabove 8 percent since February 2009, he said in response to anaudience question.

“We expect the economy to continue to grow,” Bernanke said tothe Economic Club of Indiana. “Our concern is not really arecession. Our concern is that growth will continue but at a pacethat's insufficient to put people back to work.”

Bernanke, 58, stood behind his unconventional policies by sayingthe late Nobel Prize-winning economist Milton Friedman “would havesupported what we are doing.” The Federal Open Market Committeesaid last month it will keep the main interest rate near zero untilat least mid-2015 and buy $40 billion of mortgage debt a month in athird round of quantitative easing until the labor market shows“sustained improvement.”

“We expect that a highly accommodative stance of monetary policywill remain appropriate for a considerable time after the economystrengthens,” Bernanke said in the speech. Still, policy makers'forecast for the main interest rate “doesn't mean that we expectthe economy to be weak through” mid-2015, Bernanke said.

While payrolls are expanding, economic growth of 1.5 percent to2 percent “is not fast enough to lower the unemployment rate”because it only keeps up with the number of new entrants into thelabor force, he said.

Central bank policies to boost growth should not damage thevalue of the dollar on foreign currency markets, Bernanke said. Thedollar “is about where it was before the crisis,” and pursuingmaximum employment and low and stable inflation will make the U.S.currency attractive, he said.

Also, Fed easing, including the zero-interest-rate policy, willhelp savers by fueling the expansion, Bernanke said. “Only a strongeconomy can create higher asset values and sustainably good returnsfor savers.”

Bernanke, a scholar of the Great Depression, has deployed themost aggressive monetary policies since the Fed's founding nearly acentury ago as he battled the financial crisis, helped pull thenation out of the worst recession since the 1930s and sought tokeep the expansion going.

More Assets

Bernanke expanded the balance sheet to $2.8 trillion from around$877 billion in August 2007. He also changed the composition of theFed's balance sheet, purchasing mortgage-backed securities to helplower yields for housing finance.

The Fed has taken “very much to heart” the conclusions ofFriedman and Anna Schwartz, whose 1963 book, “A Monetary History ofthe United States, 1867-1960,” said the Depression was triggered bymonetary tightening and the collapse of the banking system,Bernanke said.

“We were aggressive early on, we didn't allow the fact thatinterest rates were very low to fool us into thinking that monetarypolicy was as accommodative as it needed to be, and we wereaggressive, as you know, in trying to prevent the collapse of thebanking system,” Bernanke said. “Those are all things that Friedmanwould have supported.”

Bernanke's reference to Friedman aligns with decades of hisresearch into monetary policy during the Depression. He once calleda proper understanding of the Great Depression “the Holy Grail ofmacroeconomics.”

In a book of essays on the economy of the 1930s published in2000, Bernanke embraced much of Friedman and Schwartz's methodologywhile developing his own theories on the impact of credit on theduration and magnitude of business cycles.

As a Fed governor in 2002, Bernanke told Friedman during aspeech: “Regarding the Great Depression. You're right, we did it.We're very sorry. But thanks to you, we won't do it again.”

Bernanke applied his own scholarship and the analysis ofFriedman and Schwartz to the financial crisis. Rather than allowlarge financial institutions to collapse, Bernanke and other U.S.regulators bailed them out with taxpayer-funded capitalinjections.

After the emergency capital was paid back, the Fed throughannual stress tests forced the largest banks to hold more capital,both to avert future bailouts and to strengthen confidence bankscould lend in times of stress.

Emergency Steps

Fed emergency measures, including five years of lowinterest-rate policies, “have not led to increased inflation,” andthe public's expectations for price gains “remain quite stable,”Bernanke said today. Fed officials have the necessary tools totighten when needed to prevent “inflationary pressures down theroad,” he said.

The Standard & Poor's 500 Index maintained gains afterBernanke's comments, adding 0.3 percent to 1,444.49 at the close oftrading in New York. The yield on the 10-year Treasury note fell0.02 percentage point to 1.62 percent.

The benchmark for American equities tumbled the most in almostfour months last week, losing 1.3 percent to 1,440.63 on concernEurope's debt crisis is worsening and stimulus measures may not beenough to boost economic growth. The S&P SupercompositeHomebuilding Index slid 7.3 percent for the biggest drop since Juneamid worse-than-expected housing data.

The Fed chairman said last month he wants stronger growth andimprovement in the labor market, which he characterized as a “graveconcern.” The U.S. economy added 96,000 jobs in August, less thanforecast by economists and down from a 141,000 increase in July.The Oct. 5 jobs report may show employers added 115,000 jobs inSeptember, according to the median of 80 economist estimates in aBloomberg survey.

The economy grew less than previously forecast in the secondquarter, the Commerce Department said Sept. 27. Gross domesticproduct expanded by 1.3 percent after expanding at a 2 percent ratefrom January through March. The revision compared with a priorestimate of 1.7 percent.

At the same time, the Institute for Supply Management's U.S.factory index rose to 51.5 in September from 49.6 a month earlier,the Tempe, Arizona-based group said today. Economists in aBloomberg survey projected a reading of 49.7 for September,according to the median of 76 forecasts. The dividing line betweenexpansion and contraction is 50.

Third Round

The Fed's third round of quantitative easing, announced Sept.13, has no end date or fixed total amount, unlike the first twoprograms of bond buying. In the first, starting in 2008, the Fedbought $1.25 trillion of mortgage-backed securities, $175 billionof federal agency debt and $300 billion of Treasuries. In thesecond round, announced in November 2010, the Fed bought $600billion of Treasuries.

Some Fed officials disagreed with the new asset purchases.Richmond Fed President Jeffrey Lacker, who has dissented from everyFOMC decision this year, said in a Sept. 15 statement that heopposed new easing in mortgage-backed securities because allocatingcredit should be the province of fiscal authorities such as theU.S. Treasury or Congress.

Charles Plosser of Philadelphia said in a Sept. 25 speech thatmore easing probably won't boost growth or hiring and mayjeopardize the Fed's credibility. James Bullard of St. Louis saidin a Sept. 27 CNBC interview that policy makers should have heldoff on new bond buying until they had a clearer picture of theglobal economy. The two regional Fed bank presidents don't have avote on the FOMC this year.

Bloomberg News