NEW YORK – The European strife “poses significant risks” to our country and the Fed is watching and is ready to act if needed, Federal Reserve Board Chairman Ben Bernanke testified to Congress Thursday.

“Nevertheless, the situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Bernanke told the Joint economic Committee, according to prepared text released by the Fed. “As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.”

Fiscal policy is also an issue holding back recovery, he said. “Real federal government spending has also declined, on net, since the third quarter of last year, and the future course of federal fiscal policies remains quite uncertain.”

Bernanke said fiscal policymakers should rein in the federal budget so it’s “on a sustainable long-run path,” take care to “avoid unnecessarily impeding the current economic recovery” and “to promote a stronger economy in the medium and long term through the careful design of tax policies and spending programs.”

Long-term inflation expectations are “quite well anchored” and spikes in energy prices have “retraced.” Resource slack in labor and products markets should hold inflation in check, he said.

“With unemployment still quite high and the outlook for inflation subdued, and in the presence of significant downside risks to the outlook posed by strains in global financial markets, the FOMC has continued to maintain a highly accommodative stance of monetary policy,” Bernanke told Congress.

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