INSTANT VIEW: Bernanke sees economic improvement

NEW YORK (Reuters) - Federal Reserve Chairman Ben Bernanke on Tuesday said the outlook for the long-suffering U.S. economy appears to be improving and the U.S. central bank was carefully reviewing ways to withdraw its massive monetary policy stimulus when conditions permit.

KEY POINTS: * Bernanke cautioned that unemployment was likely to remain high into 2011, and he warned that this could sap fragile consumer confidence and potentially undermine what is expected to anyway be a very gradual recovery. * "The FOMC believes that a highly accommodative stance of monetary policy will be appropriate for an extended period," Bernanke, referring to the policy-setting Federal Open Market Committee, told U.S. lawmakers in remarks prepared for delivery in semi-annual congressional testimony. * "However, we also believe that it is important to assure the public and the markets that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation," he said. * Bernanke took pains to promise the U.S. central bank had an array of weapons at its disposal to withdraw its unprecedented monetary stimulus when the time was right, even if its balance sheet remains large for a time.

COMMENTS:

RUDY NARVAS, SENIOR ANALYST, 4CAST LTD, NEW YORK:

"He is still pretty dovish on the economy. He still believes that slack is going to remain at least through 2011. All this suggests that rates are going to be on hold for some time.

"What is interesting is, he is saying that they can raise rates even though the unwinding of the balance sheet hasn't finished yet, which is kind of important because it suggests to us that they could begin raising rates by as early as 2011. So this keeps them on hold but it also says that they are going to start raising rates to stem any sort of inflation worries before conventionally we need to."

HUGH JOHNSON, CHIEF INVESTMENT OFFICER, JOHNSON ILLINGTON ADVISORS, ALBANY, NEW YORK:

"This is real good Fed-speak. He is signaling the Federal Reserve is going to keep interest rates unchanged until financial and economic conditions improve, and they need to improve from their current state. In other words, he's not satisfied.

"He sees what he calls, 'tentative signs of stabilization' but he remains very cautious about calling this a recovery. So implicit in that statement is that the Federal Reserve will keep interest rates at their current level for an extended period of time - that we know. He does indicate that if the Federal Reserve sees labor market conditions improving, they will not hesitate to change policy and importantly, and that they have the tools for preserving price stability, which effectively means that they have the tools to reduce the levels of liquidity in the financial system before inflation takes hold."

WILLIAM SULLIVAN, CHIEF ECONOMIST, JVB FINANCIAL GROUP, BOCA RATON, FLORIDA:

"This seems to be a boilerplate appearance. He is indicating that the Fed has the tools to withdraw the liquidity that has been provided without creating additional stresses on the financial system."

"He is making it clear that the central tool to withdraw liquidity, when that withdrawal is required, in the future, is to pay interest on reserves."

CARY LEAHEY, ECONOMIST, DECISION ECONOMICS, NEW YORK:

"Bernanke is hitting the right notes in the mind of the market; there's a mild rally going on in bonds. What the bond market wanted to hear - and saw on page three of Bernanke's text - is that the Fed has the tools to raise interest rates when that becomes necessary.

"Bernanke said hardly anything about the economy and when he did, he did not sound upbeat. He said nothing about improving growth or a bottoming. He said there was a possibility that the recent stabilization in household spending would prove transient. Bernanke said there's an exit strategy from monetary ease if needed, but he also told Congress he cares about getting the economy back on its feet. He will probably be grilled about regulatory turf questions and whether the economy needs a second stimulus package."

JOHN BRADY, SENIOR VICE PRESIDENT OF GLOBAL INTEREST RATE PRODUCTS, MF GLOBAL, CHICAGO:

"The Chairman still sounds rather cautious on the economy...It's still about jobs. Until the economy starts producing jobs, the Fed is not going to start budging from its quantitative easing policy. The bond market is bouncing up a bit here. I think it will be a short-term one before supply hits."

FABIAN ELIASSON, VICE PRESIDENT OF CURRENCY SALES, MIZUHO CORPORATE BANK, NEW YORK:

"Markets were afraid the exit strategy would have figured more prominently in the statement. He's saying they have a strategy and they have the tools to tighten up rates. It's good that he alluded to that, but otherwise, his comments are pretty mild. We are nowhere near the end of this yet, as employment and other indicators are pretty grim and inflation is still under control."

JAY MUELLER, SENIOR PORTFOLIO MANAGER, WELLS CAPITAL MANAGEMENT, MILWAUKEE, WISCONSIN:

"The thing that jumped out at me immediately was the commitment to be highly accommodative for an extended period. He is basically telling everybody he will keep short rates where they are for a long time. That is the dominant passage."

BORIS SCHLOSSBERG, DIRECTOR FOR CURRENCY RESEARCH, GFT FOREX, NEW YORK:

"There was nothing unexpected in this testimony. Bernanke basically telegraphed a lot of his thoughts yesterday at an article in the Wall Street Journal. The Fed has zero intention of tightening monetary policy any time in the near future. They

want to keep the conditions in place to sustain this fragile economic recovery. I expect rates to stay stationary throughout this year and well into the next. The market sold off bit because he wasn't nearly as bullish as he usually is but it is going to be a fairly limited move."

FRANK GRETZ, MARKET ANALYST AND TECHNICIAN, SHIELDS & CO., NEW YORK:

"The market is acting so well that I doubt there will be much in the comments that will disrupt anything. The market has its technical credentials right now, the Nasdaq is ahead of the Dow and S&P, that's the kind of pattern that doesn't usually get you into trouble. While the market may stall here for whatever reason, and people could use the comments as an excuse for that, I think we're headed higher."

TOM PORCELLI, SENIOR ECONOMIST, RBC CAPITAL MARKETS, NEW YORK:

"It's not a surprise as he remains cautious on his outlook. This was telegraphed in the FOMC minutes last week. He also pre-empted himself last night. I hope he will discuss the fiscal outlook and whether there could be more fiscal stimulus. The worse is probably behind us, but obviously there are risks."

MARKET REACTION: STOCKS: U.S. stock indexes pared gains, with the S&P 500 turning negative. BONDS: U.S. Treasury debt prices turned positive. DOLLAR: U.S. dollar fell against the yen.