Federal Reserve Chairman Ben Bernanke stepped up calls to preserve Fed independence on Wednesday, saying central banks best deliver steady economic growth and low inflation when free from political meddling.

Bernanke's comments address the U.S. central bank's overarching worry about the sweeping overhaul of financial rules making steady progress through the U.S. Congress: a provision subjecting the Fed's monetary policy decisions to congressional audits.

Political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation, Bernanke said in remarks prepared for delivery to a conference at the Bank of Japan.

The audit provision, authored by political outlier and long-time Fed abolition advocate Representative Ron Paul, gained surprise inclusion in proposed House of Representatives legislation late last year.

Hunger for greater Fed accountability stemmed from lingering resentment at big bank bailouts during the financial crisis and discomfort at the Fed's autonomy in launching financial rescues worth tens of billions of dollars.

The Fed lobbied hard against the provision and beat back the inclusion of similar language from regulatory reform legislation recently approved in the Senate.

However, the two legislative bodies must now meld separate bills before the financial rules rewrite can be signed into law.

The Fed chairman did not discuss the outlook for the U.S. economy or interest rates, but argued that central banks must be able to act based on what is best for the economy in the long run, even if its actions pinch in the short-term.

Bernanke said central banks subject to political influence may face pressures to delay raising borrowing costs when inflation begins to surface to achieve short-term gains in employment and growth.

In addition, a government that controls a central bank may be tempted to push the institution to print money to finance a budget deficit, Bernanke said.

Central bank independence is important not just in connection with setting interest rates to spur or slow economic growth, he said, but also in deploying a recent addition to the policy-making tool kit, that of flooding the financial system with money to stimulate growth, referred to as quantitative

easing.

The costs of undue government influence on the central bank's quantitative easing decisions could be especially large, since such an influence might be tantamount to giving the government the ability to demand the monetization of its debt, he said.

The Fed chairman tacitly acknowledged concerns that the U.S. central bank had overstepped its responsibilities during the crisis or that it operates under a shroud of secrecy.

He said the Fed supports efforts to clarify the dividing line between monetary and fiscal responsibilities. In that connection, the Fed backs a mechanism to shut down failing financial firms, he said.

The case for independent lender-of-last resort function is strongest when the associated fiscal risks are minimal, he said.

The central bank has a responsibility to be transparent and accountable, and the Fed has in recent years stepped up efforts to make public its deliberations and activities, he said.

(Editing by Tomasz Janowski)

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