WASHINGTON - Federal Reserve Chairman Ben Bernanke Tuesday said the central bank must monitor economic conditions and avoid jumping the gun by withdrawing monetary stimulus while the recovery remains fragile, an indication that he remains in no hurry to pull the trigger and scale back the Fed's support for the economy.

In comments during a lecture to student at George Washington University that was mainly an overview and history of the central bank, Bernanke pointed to the Fed's premature tightening during the late 1930s that he said sparked a second recession.

The Great Depression was actually made up of two recessions, Bernanke said -- a sharp downturn from 1929 to 1933 following the stock market crash, a period of growth from '33 to '37 and then a second contraction between 1938 to 1939 which, although serious, "wasn't quite as serious as the first one."

There is a view that the second recession resulted from "a premature tightening of monetary and fiscal policy," he said.

"The early interpretations, at least, were that the reversal in policy too soon prevented the recovery from proceeding faster ... . I think if you accept that traditional interpretation, it is that you need be attentive to where the economy is and not move too quickly to reverse the policies that are helping the economy," Bernanke said.

The Fed, following its creation in 1913, met its first great challenge in the Great Depression and "it failed," he said.

Bernanke noted that the current recovery is taking longer than usual because it was triggered by a global financial crisis. There are "a lot of issues still to be resolved," he said.

The Fed has come under strong criticism, mainly from emerging market economies, that its policies import inflation, but Bernanke said having a flexible exchange rate policy helps limit the transmission of such policies.

Flexible exchange rates can adjust and tend to "insulate" other countries from the effects of monetary policy in a given country, he said.

On the other hand, fixed exchange rates between countries tend to transmit "both good and bad policies ... and take away the independence that individual countries have to manage their own monetary policy," Bernanke said.

An example of the risk in having a fixed foreign exchange rate can be seen in the relationship between China's currency and the U.S. dollar, the Fed chairman said.

"If the Fed lowers interest rates and stimulates the U.S. economy, because say we are in a recession, it means also that monetary policy becomes easier in China as well because interest rates have to be the same in different countries with essentially the same currency," Bernanke said.

"Those low interest rates may not be appropriate for China, and as a result China may experience inflation because it's essentially tied to U.S. monetary policy," he added.

Asked to comment on the Fed's tackling of the bubble that caused the stock market crash of 1929, and the lessons to be learned, Bernanke said: "What we've learned about asset price bubbles is they are dangerous and we want to address them if possible.

"But where you can address them through financial regulatory approaches, that's usually a more pinpoint approach than just raising interest rates for everything."

On his thoughts as to why some continue to make an argument for a return to the gold standard, Bernanke said that sentiment is borne out of a desire to maintain the long-run value of the dollar, as proponents of the gold standard believe paper money is inherently inflationary.

"I think though that the gold standard would not be feasible for both practical reasons and policy reasons," Bernanke said, as not only is there not enough gold available globally but a return to the gold standard would mean "we are swearing that under no circumstances, no matter how bad unemployment gets, are we going to do anything about it using monetary policy."

"There's a good bit of evidence that the gold standard was one of the main reasons that the Depression was so deep and long," Bernanke said, and those countries that shifted to a more flexible policy recovered much more quickly than those who stayed on gold "to the bitter end."

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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