Bernanke offers few hints on further Fed easing

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke on Tuesday offered few new clues on whether the U.S. central bank was moving closer to a fresh round of monetary stimulus, repeating the Fed's pledge to act if needed.

Bernanke told the Senate Banking Committee the U.S. economic recovery was being held back by anxiety over Europe's debt crisis and the path of U.S. fiscal policy.

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 in market parlance - to support the economy.

Prices for U.S. stocks initially fell but clawed back into positive territory by midday, while the dollar rallied and prices for longer-dated U.S. government debt erased losses.

"The market was preparing for some signal of imminent policy action from the Fed and they certainly did not get that," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

JOB SLOWDOWN CAN'T BE EXPLAINED AWAY

The Fed's next policy meeting lasts two days and ends August 1. 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 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.

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 percent 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 Fed policymakers would consider a range of tools to further stimulate growth if it became clear the labor market was not improving or if there was a risk of a deflation.

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.

Bernanke told lawmakers that recent deterioration in the labor market suggests the nation's 8.2 percent jobless rate will come down all too gradually, admitting for the first time the softness could not be explained away by purely seasonal factors.

During the second quarter, job creation averaged 75,000 per month, down from an average of 226,000 in the first quarter.

TROUBLE AT HOME AND ABROAD

Bernanke told the committee that manipulation of the global benchmark interest rate Libor by banks and traders had undermined confidence in financial markets.

He said the process of calculating the Libor - in which banks submit estimates of their borrowing costs - was "structurally flawed," but the Fed had limited authority to force changes since it was overseen by the British Bankers' Association.

Bernanke repeated his warning to lawmakers about the importance of developing a credible long-term plan to reduce U.S. budget deficits while avoiding the "fiscal cliff" of sharp spending cuts and tax hikes that are scheduled to take place at the start of next year, warning it could tip the already weak economy into a recession.

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 U.S. 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.

(Editing by Tim Ahmann, Neil Stempleman and Chizu Nomiyama)

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