* Bernanke says U.S. job market far from normal
* Testimony dovish, but no clear signal of further easing
* Oil prices could temporarily lift inflation, hurt spending
* Urges congressional action to avoid "fiscal cliff" in 2013
By Mark Felsenthal and Pedro da Costa
WASHINGTON, Feb 29 Federal Reserve
Chairman Ben Bernanke on Wednesday offered a tempered view of
the U.S. economy, pouring cold water on the notion recent upbeat
signs herald a stronger recovery.
Bernanke told Congress that unless growth accelerated, the
unacceptably high U.S. unemployment rate would not keep
But he stopped short of signaling further Fed bond
purchases, dashing the hopes of some traders in financial
markets who were betting on more monetary stimulus.
"The job market is far from normal," Bernanke said.
"Continued improvement ... is likely to require stronger growth
in final demand and production."
The swift decline in the U.S. unemployment rate in recent
months, to a three-year low of 8.3 percent in January from 9.1
percent in August, has surprised economists both within and
outside the Fed given the economy's relatively soft performance.
Last year, the economy expanded only 1.7 percent, although
the fourth quarter proved to be the strongest.
"The decline in the unemployment rate over the past year has
been somewhat more rapid than might have been expected, given
that the economy appears to have been growing during that time
frame at or below its longer-term trend," Bernanke told the U.S.
House of Representatives Financial Services Committee.
Bernanke's tentative outlook knocked the Dow Jones
industrial average below the symbolic 13,000 level it had closed
above on Tuesday. Stock prices had been marching higher all year
on optimism about gathering economic momentum.
While Bernanke's tenor was dovish, the lack of a direct
allusion to the possibility of a third round of so-called
quantitative easing also undercut prices for government bonds
and pushed the dollar up. Gold prices slumped
3 percent, their biggest one-day drop in 2-1/2 months.
"Bernanke implied that the Fed was no closer to QE3 ...
Investors were disappointed," said Cary Leahey of Decision
Economics in New York.
Minutes of the Fed's January meeting released earlier this
month suggested a consensus for more bond purchases would only
emerge if the economic outlook worsened.
In a report prepared for its next meeting on March 13, the
Fed said on Wednesday that the economy has expanded modestly
since the start of the year, with hiring picking up in some
The U.S. central bank cut overnight interest rates to near
zero in 2008 and has bought $2.3 trillion in bonds in an effort
to keep interest rates low and boost economic activity.
After a policy meeting last month, the Fed said benchmark
rates would stay exceptionally low through late 2014.
Bernanke made clear on Wednesday that the pledge referred
specifically to the current zero to 0.25 percent range for
overnight rates. Some analysts had speculated it could encompass
a somewhat higher but still historically low rate level.
Sustaining a highly accommodative monetary policy stance is
consistent with the Fed's goals of achieving full employment
with low and steady inflation, he said.
Asked whether the Fed was hurting savers with its easy
monetary policy, Bernanke said a case could be made that
interest rates should be even lower and that savers would
benefit from a stronger economy.
"It is arguable that interest rates are too high, that they
are being constrained by the fact that interest rates can't go
below zero," he said.
Cleveland Federal Reserve Bank President Sandra Pianalto on
Tuesday said it could take four to five years to ratchet the
jobless rate down to about 6 percent.
SAYS OIL CUTS BOTH WAYS
Bernanke also addressed the recent rise in oil prices, which
he said could both raise inflation for a time and curb spending.
"Gasoline prices have moved up ... (which is) a development that
is likely to push up inflation temporarily while reducing
consumers' purchasing power," he said.
Strong jobs and factory data since the Fed last met have
calmed fears U.S. growth would slow sharply early this year, and
have led economists to scale back expectations for a further
easing of monetary policy.
But tensions between Western nations and Iran over Tehran's
nuclear ambitions have escalated, threatening a repeat of 2011
when a spike in energy prices hit the recovery hard.
Some financial market participants thought Bernanke's nod to
potential price pressures from energy costs, however qualified,
marked a heightened level of vigilance on inflation.
"Any acknowledgement of inflationary pressures by the Fed
could potentially shut the door on additional stimulus," said
Ashraf Laidi, chief global strategist for City Index in London.
Nervousness about oil supplies has pushed prices for crude
to 10-month highs, although prices fell on
Wednesday as U.S. data showed higher-than-expected oil
Bernanke also warned that the U.S. recovery could come off
the rails in 2012 if Congress failed to take action to address a
"massive fiscal cliff" of tax increases and spending cuts due to
kick in early that year.
"I hope that Congress will look at that and figure out ways
to achieve the same long-run fiscal improvement without having
it all happen at one date," he said.
However, Bernanke played down risks to the United States
from a likely euro zone recession.
"If Europe has a mild downturn, which is what they are
currently forecasting, and if the financial situation remains
under control ... the effect on the U.S. might not be terribly
serious, at least it probably would not threaten the recovery,"