Federal Reserve Chairman Ben Bernanke said on Wednesday the central bank might need to ease monetary policy further if inflation or inflation expectations fall significantly.
In his first public remarks since the Fed launched a fresh measure aimed at keeping down long-term borrowing costs, Bernanke indicated a willingness to push deeper into the realm of unconventional policy if economic growth remains weak.
It is something that we're going to be watching very carefully, Bernanke said in response to questions from the audience at a forum sponsored by the Cleveland Fed.
If inflation falls too low or inflation expectations fall too low that would be something we have to respond to because we do not want deflation.
The comment was made in response to a question about a recent decline in market-based inflation expectations, which policymakers see as a good gauge of future inflation trends.
The gap between yields on 10-year Treasury notes and their inflation-protected counterparts fell to 1.70 percent last week, the lowest since September 2010. It has edged up slightly since then and last stood at 1.86 percent.
(Reporting by Kim Palmer, Pedro da Costa and David Lawder in Washington; Editing by Padraic Cassidy)