June 7, 2012 / 2:38 PM / 6 years ago

UPDATE 3-Bernanke says Fed to act if Europe crisis deepens

* Fed ready to intervene if financial stresses escalate
    * Bernanke says Europe poses "significant" risk
    * His tone differs from Yellen, who wants monetary insurance
    * Sets stage for lively debate at June 19-20 Fed meeting

    By Pedro da Costa and Mark Felsenthal	
    WASHINGTON, June 7 (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
    "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
    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.
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