WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke said on Thursday the U.S. central bank was ready to shield the economy if financial troubles mount but offered few hints that further monetary stimulus was imminent.
He told Congress the Fed was closely monitoring "significant risks" to the U.S. recovery from Europe's debt crisis but struck a decidedly different tone from the central bank's No. 2 official, who argued in favor of monetary support on Wednesday.
For investors hungry for clues about the prospect for a third round of large-scale Fed bond buying, Bernanke's testimony disappointed.
"The Federal Reserve remains prepared to take action as needed to protect the U.S. economy in the event that financial stresses escalate," Bernanke told the congressional Joint Economic Committee.
Stocks pared gains on Bernanke's remarks but remained positive after a steep rally on Wednesday, while the dollar strengthened against the euro.
"It doesn't really settle the debate," said Vassili Serebriakov, senior currency strategist at Wells Fargo. "There was some hope for more concrete signs, a clearer hint, that further easing is forthcoming, and I don't think we got that today.
Slowing U.S. job creation, evident in surprisingly weak employment data last Friday, and an escalation in the euro zone's crisis had raised expectations of Fed action, perhaps as early as the central bank's next policy meeting on June 19-20.
Yet Bernanke's tone was far from crisis mode.
Indeed, he sounded somewhat sanguine about the outlook.
"Economic growth appears poised to continue at a moderate pace over coming quarters," he said. "Despite economic difficulties in Europe, the demand for U.S. exports has held up well."
Fed Vice Chair Janet Yellen made the case on Wednesday for acting before the economy worsened, either by outright bond purchases or other means, given "a number of significant downside risks" to growth.
Bernanke made no such suggestion, although Europe was not his only worry spot. He told legislators tighter U.S. fiscal policies set to take effect early next year if Congress doesn't act "would, if allowed to occur, pose a significant threat to the recovery."
The government said last Friday that U.S. employment growth slowed for a fourth straight month in May, with employers adding a paltry 69,000 workers to their payrolls.
Bernanke said the slowdown may have been exaggerated because unusually warm weather in the winter had pulled forward hiring. However, he also raised a more troubling prospect: that the economy was simply growing too slowly.
He said the main question Fed policymakers will face later this month is whether the economic recovery will move forward swiftly enough to keep the labor market on an improving path.
The debate at the Fed's meeting will likely be heated, given the range of views officials have expressed this week about the desirability of a further easing of monetary policy.
Bernanke, who said he did not want to prejudge the outcome of the meeting, left economists split on whether and when the Fed might act.
"While a few Fed officials have been more supportive of further easing in recent days, overall Mr. Bernanke indicated that the Fed is still in wait-and-see mode," said Michael Hanson, senior economist at Bank of America Merrill Lynch.
With the meeting less than two weeks away, many analysts said economic data would likely not be the decisive factor. Instead, events in Europe might hold the key.
Worries about the health of Spain's banks and concerns Greece could exit the euro zone after an election on June 17 - two days before the Fed meets - have unsettled global markets, and the U.S. recovery increasingly appears at risk.
Growth in major emerging economies like Brazil, India and China has slowed sharply. China responded on Thursday with its first interest rate cut since the global financial crisis.
In contrast, the European Central Bank on Wednesday and the Bank of England on Thursday held fire.
The Fed has kept benchmark U.S. interest rates near zero since late 2008 and has expanded its balance sheet sharply to nearly $3 trillion to keep long-term borrowing costs down.
Its most recent stimulus program, known as Operation Twist, is set to expire at the end of June. That program involves selling shorter-dated Treasury securities and buying longer-term ones in an effort to press long-term rates lower.
Short of expanding its balance sheet through outright bond purchases, the Fed could extend Operation Twist.
An even less drastic option would be to push its conditional pledge to keep interest rates low through at least late 2014 further into the future.
"They all sound as if it's not going to take a lot to convince them to vote for doing something relatively easy," said Omair Sharif, U.S. economist at RBS Marketplace.
Additional reporting by Anna Sussman in New York; Editing by Tim Ahmann and Kenneth Barry