The Federal Reserve stands ready to offer additional monetary support to a US economy that has slowed significantly in recent months, Fed Chairman Ben Bernanke told lawmakers.
He told the Senate Banking Committee the recovery was being held back by tighter financial conditions due to Europe's debt crisis and uncertainty surrounding US fiscal policy.
Financial markets had looked forward to Bernanke's testimony for any signs the central bank was moving closer to a third round of bond purchases to support the economy. But the Fed chief hewed closely to the message of watchful waiting that the central bank's policy panel delivered in June, and yielded few new clues.
"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 prepared remarks on the Fed's semi-annual monetary policy report.
The Fed has held overnight borrowing costs near zero since December 2008 and has bought $2.3 trillion in government and mortgage-related debt in an effort to push long-term interest rates lower.
As the recovery faltered, it has promised to hold rates at rock bottom levels until at least last 2014 and has extended the average maturity of bonds in its portfolio in a further effort to depress long-term borrowing costs.
Despite the Fed's support, the economy is growing too slowly to lower unemployment. U.S. gross domestic product expanded at a tepid 1.9 per cent annual rate in the first quarter, and economists think its second quarter performance was even weaker.
Bernanke told lawmakers recent deterioration in the labour market suggests the nation's 8.2 percent jobless rate will come down all too gradually, admitting for the first time that the softness could not be explained away by purely seasonal factors.
The central bank chief was likely to be peppered with questions about his knowledge of the Libor rate-fixing scandal after it emerged last week that Treasury Secretary Timothy Geithner, then head of the New York Fed, was aware of problems in the setting of interbank rates in early 2008.
Bernanke repeated his warning to lawmakers about the importance of developing a credible long-term plan to reduce U.S. government debt levels while avoiding sharp spending cuts and tax hikes in the near-term. He highlighted concerns about a looming "fiscal cliff" that would likely send the economy into recession unless Congress acts.
In addition to uncertainty related to fiscal policy, the economy is being restrained by tight borrowing conditions for some businesses and consumers, Bernanke said.
Bernanke said the Fed remains in close contact with European authorities, and is focused on making sure the US financial system remains resilient to financial shocks.
"Europe's financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the United States," he said.
He said the Fed was already offering stimulus to the economy through its Operation Twist program of buying long-term securities and selling short-term ones, which is aimed at putting downward pressure on long-term borrowing costs.
City A.M. Reporter