Federal Reserve Chairman Ben Bernanke on Tuesday offered few new clues on whether the US central bank was moving closer to a fresh round of monetary stimulus, even as he underscored his concerns over the economy's weakness.
Bernanke told the Senate Banking Committee the US economic recovery was being held back by anxiety over Europe's debt crisis and the path of US fiscal policy.
The Fed chairman told lawmakers the central bank was considering a range of tools it could employ to help the economy but he hewed closely to the message of watchful waiting that the central bank's policy panel delivered in June.
Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to economic growth, the committee made clear at its June meeting that it is prepared to take further action, Bernanke said in his testimony on the Fed's semi-annual monetary policy report.
Some investors had hoped the Fed chief would signal that the central bank was moving close to a third round of bond purchases -- or QE3 -- to support the economy.
Prices for US stocks initially fell on disappointment but clawed back into positive territory by midday as investors bought shares that could perform well in a struggling economy. The dollar rallied and prices for US government debt fell.
The Fed has held overnight borrowing costs near zero since December 2008 and has bought 2.3 trillion dollars in government and mortgage-related debt to push long-term interest rates lower.
As the recovery faltered, it has promised to hold rates at rock bottom levels until at least 2014 and extended the average maturity of bonds in its portfolio in a further effort to depress long-term borrowing costs. At its June meeting, the Fed ramped up its efforts to rebalance its portfolio. It next meets July 31-August 1.
Despite the Fed's support, the economy is growing too slowly to lower unemployment. US GDP expanded at a tepid 1.9% annual rate in the first quarter, and economists think its second-quarter performance was even weaker.
With growth slowing around the globe, many other central banks have also eased policy recently, including the European Central Bank and the central banks of Britain and China.
Bernanke said the risks of a surge in inflation were low and that there was actually a modest risk of deflation, a potentially disabling fall in prices.
He said Fed policymakers would consider a range of tools to further stimulate growth if it became clear the labour market was not improving or if deflation risks mounted.
He cited the possibility of additional bond buying -- whether Treasury debt or mortgage-backed securities -- lending through the Fed's emergency loan window, and lowering the rate the Fed pays banks on reserves held at the central bank. The Fed could also use communications tools, such as extending its pledge to hold rates exceptionally low, Bernanke added.