Federal Reserve Chairman Ben Bernanke on Wednesday fought hard to protect the independence of the U.S. central bank and keep responsibility for consumer protection on financial products in its hands.

In a second day of testimony on the Fed's semiannual monetary policy report, Bernanke told the Senate Banking Committee that the U.S. central bank wants to shield monetary policy from political interference, but understands the need to be accountable to taxpayers.

We do think that the Congress has the right to see how we are using taxpayer money. Where we are concerned is that the Congress would be intervening in our specific policy decisions relating to monetary policy and the economy, Bernanke said when asked about a proposal to expand audits of the Fed.

So yes, we are quite willing to work with Congress to try to figure out exactly where the line should be, he said.

The Fed has pushed back hard against a bill that has already won sponsorship by a majority of the U.S. House of Representatives, and a companion Senate measure, that would expose monetary policy decisions to audits by the Government Accountability Office, a federal watchdog.

The central bank has argued such audits would alarm financial markets and drive U.S. borrowing costs higher as investors would come to fret politics, not economics, would drive monetary policy-making.

Some investors are already nervous that the Fed might face pressure to create money to finance record U.S. budget deficits. The Fed says these concerns would intensify if there was any move to put its policy under political sway.

Bernanke was also challenged on whether he would have the courage to raise interest rates to keep inflation at bay if the economy was still weak.

He said emphatically that he would, provided Congress did not change the rules to stop him, and he invoked the Fed's epic anti-inflation campaign in the late 1970s under Paul Volcker to illustrate why independence was key to safeguard this freedom.

It was in 1978 in the Humphrey Hawkins bill that Congress put in the exclusion for monetary policy from the GAO audit bill, he said, referring to the law that requires the Fed to report to Congress twice-yearly on the economy.

That was right before Volcker came in and Volcker was able to take those decisions (to raise interest rates sharply) because Congress did not intervene, although there were plenty in Congress who said they should intervene, Bernanke said.

FED BID TO RETAIN CONSUMER PROTECTION POWERS

U.S. lawmakers have responded to public anger over last year's crisis and subsequent multibillion-dollar bailouts of investment bank Bear Stearns and insurer American International Group by demanding greater Fed accountability.

This scrutiny intensified after President Barack Obama proposed making the Fed responsible for overseeing systemic financial risks as part of a broad revamp of the U.S. regulatory structure. The revamp would also strip the Fed of consumer protection powers and invest them with a new agency.

Bernanke admitted that the Fed had not done as good a job as it should have protecting consumers in the past. But he made a concerted pitch to keep these responsibilities at the central bank, telling lawmakers that they could take additional steps to be assured the Fed would take these duties very seriously.

A few suggestions I would make: One would be to put consumer protection in the Federal Reserve Act along with full employment and price stability as a major goal of the Fed, he said.

A second step could be to require the (Fed) chairman to come before you or another committee at least once a year to present a report, the same way we do for monetary policy, on our consumer protection steps, Bernanke said.

Ben Bernanke