WASHINGTON - Federal Reserve Chairman Ben Bernanke gave no hint of new monetary stimulus measures, but said that the Fed's currently "highly accommodative" monetary stance is "consistent" with both its price stability and maximum employment objectives.

Bernanke, delivering the Fed's semi-annual Monetary Policy Report to Congress, said that the recent upsurge in gasoline prices will tend to increase inflation "temporarily" while also tending to undermine already soft consumer spending and in turn economic growth.

He seemed to resolve those conflicting concerns in favor of growth by emphasizing the temporary nature of gasoline's inflation impact and saying that inflation expectations suggest that inflation will remain "subdued" in testimony prepared for delivery to the House Financial Services Committee.

Bernanke acknowledged improvements in labor market conditions in recent months but suggested a good degree of skepticism, suggesting that the gains in non-farm payrolls and reductions in the unemployment rate are not consistent with the modest pace of GDP growth. To get further improvements in the job market, he said the economy will likely have to grow faster.

Bernanke said the Fed would take a "balanced" approach if either unemployment or inflation were to "deviate" from the Fed's objectives, implying that a temporary rise in inflation probably would not lead the Fed to lessen the degree of monetary accommodation so long as unemployment remains high.

The Fed chief was moderately upbeat about the situation in Europe in wake of the weekend's Group of 20 meeting and the inking of a new rescue package for Greece, but like Treasury Secretary Timothy Geithner suggested that much more needs to be done.

In his Jan. 25 press conference, which followed a meeting of the Fed's policymaking Federal Open Market Committee, Bernanke said the FOMC "is prepared to provide further monetary accommodation if employment is not making sufficient progress towards assessment of maximum level or inflation shows signs of moving below the mandated consistent rate."

There was no such statement of preparedness to ease further in Wednesday's congressional testimony, which he was delivering on behalf of the FOMC.

Instead, after reviewing stimulative actions already taken, Bernanke contented himself with saying "the Committee judges that sustaining a highly accommodative stance for monetary policy is consistent with promoting both objectives."

"However, in cases where these objectives are not complementary, the Committee follows a balanced approach in promoting them, taking into account the magnitudes of the deviations of inflation and employment from levels judged to be consistent with the dual mandate, as well as the potentially different time horizons over which employment and inflation are projected to return to such levels," he added

At the same time, nothing in Bernanke's testimony was at odds with the possibility of a third round of quantitative easing.

For one thing, he continued to sound relatively glum about the economy -- the labor market in particular.

True, there have been "some positive developments in the labor market," he said, pointing to average private payroll gains of 165,000 jobs per month since the middle of last year, the dip in unemployment to 8.3% and the recent downtrend in new claims for unemployment insurance benefits.

However, Bernanke suggested these data must be interpreted very cautiously, if not skeptically.

"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," he said, adding, "continued improvement in the job market is likely to require stronger growth in final demand and production."

"Notwithstanding the better recent data, the job market remains far from normal: The unemployment rate remains elevated, long-term unemployment is still near record levels, and the number of persons working part time for economic reasons is very high," Bernanke said.

The Fed chairman went on to observe that "the fundamentals that support spending continue to be weak" and pointed to ongoing problems on both the supply and demand side of the housing market. He was more upbeat about manufacturing.

Bernanke noted that FOMC participants, in their January forecasting exercise, revised down their expectations for GDP growth and look for the economy to grow no more than it did in the second half of last year -- about 2 1/4%.

"In light of the somewhat different signals received recently from the labor market than from indicators of final demand and production, however, it will be especially important to evaluate incoming information to assess the underlying pace of economic recovery," he said.

Meanwhile, inflation seemed to be the least of Bernanke's concerns. He recalled that the inflation upsurge caused by commodity price increases last spring had proven transitory as he predicted. And he said a similar pattern is likely to unfold this Spring.

Since the FOMC met and anticipated "subdued" inflation, he observed that gasoline prices have risen due to soaring oil prices. But he called this " development that is likely to push up inflation temporarily while reducing consumers' purchasing power."

"We will continue to monitor energy markets carefully," he continued, but he observed, "Longer-term inflation expectations, as measured by surveys and financial market indicators, appear consistent with the view that inflation will remain subdued."

Bernanke defended the Fed's new 2% inflation target in the context of an overall push to increase "transparency."

Anticipating potential objections to the Fed's policy of targeting inflation but not unemployment, he said, "While maximum employment stands on an equal footing with price stability as an objective of monetary policy, the maximum level of employment in an economy is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market; it is therefore not feasible for any central bank to specify a fixed goal for the longer-run level of employment."

"However, the Committee can estimate the level of maximum employment and use that estimate to inform policy decisions," he went on, noting that in January the FOMC participants estimated a longer-run, normal rate of unemployment in the range of 5.2% to 6.0%.

Bernanke stressed that "the level of maximum employment in an economy is subject to change; for instance, it can be affected by shifts in the structure of the economy and by a range of economic policies. If at some stage the Committee estimated that the maximum level of employment had increased, for example, we would adjust monetary policy accordingly."

Europe has been one of the "headwinds" facing Fed policymakers for more than a year, and Bernanke gave an even-handed assessment of the current risks from that direction.

"A number of constructive policy actions have been taken of late in Europe, including the European Central Bank's program to extend three-year collateralized loans to European financial institutions," he said. "Most recently, European policymakers agreed on a new package of measures for Greece, which combines additional official-sector loans with a sizable reduction of Greek debt held by the private sector."

"However, critical fiscal and financial challenges remain for the euro zone, the resolution of which will require concerted action on the part of European authorities," he continued. "Further steps will also be required to boost growth and competitiveness in a number of countries."

Bernanke added that "we are in frequent contact with our counterparts in Europe and will continue to follow the situation closely."

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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