In testimony prepared for a House Financial Services Committee hearing that was called off because of a blizzard in Washington, Mr. Bernanke said that another interest rate might for a time replace the federal-funds rate as the main policy tool. That’s the rate the Fed pays to banks on excess reserves they leave at the central bank.

Mr. Bernanke said that though the economy needed support from monetary policy, the Fed would “at some point” increase short-term rates and drain some of the money it had pumped into the economy during the recession. He gave no hint that such a move was imminent.

As part of its plans to wind down emergency liquidity measures, the Fed may “before long” increase the difference between the discount rate and the federal-funds rate, a Fed-influenced rate at which banks lend to each other overnight, he said. The spread between the rates is a quarter percentage point; before the crisis, it was a full point.

Mr. Bernanke’s speech was designed to outline the Fed’s strategy for withdrawing its extraordinary support for the economy, which has brought the federal-funds rate near zero and led the Fed to buy more than $1 trillion worth of U.S. Treasury and mortgage-backed securities. He said the sequencing and tools the Fed would use to tighten policy would depend on how the economic recovery develops.

The Fed chairman said he didn’t currently anticipate the Fed would sell any of its holdings of long-term U.S. Treasurys or mortgage-backed securities “in the near term,” and probably not “until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery.” But over time, he said, “the Federal Reserve anticipates that its balance sheet will shrink toward more historically normal levels and that most or all of its security holdings will be Treasury securities.”

A focus on the interest rate for excess reserves—now at 0.25%—would present markets with a new signal to follow when the Fed begins tightening credit. “It is possible that the Federal Reserve could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities, as a guide to its policy stance,” Mr. Bernanke said, adding no final decision had yet been made.

Raising the excess-reserves rate would give banks an incentive to park more funds at the Fed instead of lending them out to companies or households. In this way, the Fed would be able to restrain an economy that risks overheating and sparking inflation. Moving this rate would pull up other short-term rates, including the federal-funds rate, long the Fed’s main tool for steering the economy.

While other major central banks, such as the European Central Bank, have been using interest on excess bank reserves for a while, it’s a new tool for the Fed. Congress gave the central bank authority to use it in October 2008.

Mr. Bernanke says the Fed expects “it will eventually return to an operating framework with much lower reserve balances than at present and with the federal-funds rate as the operating target for policy.”

The third quarter review of monetary policy was about ensuring price stability. And, it was articulated clearly, as the Reserve Bank of India (RBI) said it was worried over rise in food prices affecting other commodities and services.

While RBI’s policy action, an increase of 75 basis points in the cash reserve ratio (CRR), was aimed at containing inflation and managing inflationary expectations, Governor D Subbarao was candid enough to mention at a post-policy press conference that the central bank struggled with price-based and quantity-based variables but settled for a CRR hike, as it would anchor inflationary expectations without upsetting growth.

He said inflation largely stemmed from supply-side factors, though there were some demand pressures too. But the latter were largely incipient, he added.

The decision to suck out liquidity came in the backdrop of expectations of higher capital inflows, which could add to inflationary pressures. “Depending on how these (inflows) are handled, there will be implications in terms of a combination of exchange rate appreciation, larger systemic liquidity and the fiscal cost of sterilisation,” said the review.

RBI appeared less worried about economic growth, though it said the recovery was still uneven and public expenditure continued to play a dominant role. Despite this, the strong industrial growth in recent months and recovery in exports gave enough comfort to the central bank to revise the growth estimate for the current financial year from 6 per cent to 7.5 per cent.

Subbarao said by merely increasing CRR, RBI was trying to encourage investments to support the recovery process and contain inflationary pressures from the demand side.

RBI’s assessment was that despite Rs 36,000 crore being sucked out of the system on account of a higher CRR, there would be sufficient amount in the system to meet credit demand. It acknowledged lower demand by revising the credit growth estimate to 16 per cent, which is still higher than the 13.88 per cent reported for the financial year till January 15.

In contrast, the revised projections on deposit and money supply growth are in line with the levels seen this year.

With limited options as far as using imports to check food prices are concerned, signs of firming up of global commodity prices and the looming threat of increasing crude oil prices, the central bank raised the estimate for inflation based on the wholesale price index to 8 per cent at the end of March from 6.5 per cent projected three months ago.

In December, inflation was 7.3 per cent and, according to RBI’s assessment, it will start moderating only from July. But even that comes with a caveat: “This moderation in inflation will depend upon several factors, including the measures taken and to be taken by the Reserve Bank as part of the normalisation process.”

Subbarao said the monetary policy would continue to condition and contain the perception of inflation in the range of 4-4.5 per cent, with the medium-term target being 3 per cent.