The chairman of the US central bank, Ben Bernanke, defended the Federal Reserve’s massive bond-buying stimulus programme and urged Congress to avoid $85 billion of automatic spending cuts this year starting on Friday.

Mr Bernanke told the Senate banking committee that the benefits of the unprecedented asset purchases outweigh the risks and warned that the spending cuts could be a “significant” drag on economic recovery.

Fed policymakers understood the potential risks of their extraordinary support, he said, but he eased earlier market concerns that historically low interest rates would rise, saying that the Fed would maintain these money-easing policies “as long as needed”.

Denying that the Fed was following a “beggar-thy-neighbour policy”, Mr Bernanke said there was “no risk-free approach” but the risk of doing nothing was “severe as well” and that monetary policy was aiding economic recovery.

“We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a strong economic recovery and more-rapid job creation,” he said in the first of his twice-annual briefings to the US Congress.

Subdued inflation

“Inflation is currently subdued and inflation expectations appear well-anchored,” he said.

The US dollar gain in value and US stocks increased, rebounding from their worst drop since November.

Mr Bernanke urged lawmakers to avoid the deep spending cuts under so-called “sequestration”, warning that they, along with earlier tax increases, would shave 0.6 per cent off economic growth this year.

Economists fear rising inflation if the Fed is unable to unwind its bond-buying programme smoothly.