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Federal Reserve Chairman Ben Bernanke on Wednesday offered a tempered view of the U.S. economy, pouring cold water on the notion that recent upbeat signs herald a stronger recovery.
Bernanke told Congress that unless growth accelerated, the unacceptably high U.S. unemployment rate would not keep dropping.
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.
"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.
While the tenor of Bernanke's remarks was dovish, the lack of a direct allusion to the possibility of a third round of so-called quantitative easing undercut prices for U.S. stocks and government bonds, and hit gold prices hard. Gold slumped more than 4 percent, the biggest one-day drop this year.
"Bernanke implied that the Fed was no closer to QE3 ... Investors were disappointed," said Cary Leahey of Decision Economics in New York.
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.
Sustaining a highly accommodative monetary policy stance is consistent with the Fed's goals of achieving full employment with low and steady inflation, Bernanke 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 consumption. "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 eased worries U.S. growth would slow sharply early this year, and have led economists to scale back their 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 inventories.
In the United States, gasoline prices are rising toward $4 US a gallon, posing a risk to the recovery and leaving President Barack Obama open to criticism from Republicans on the campaign trail ahead of November's election.
Average U.S. retail gasoline prices are now at nearly $3.72 per gallon, up from $3.37 a year ago. If tensions with Iran, a major producer, continue into the U.S. summer driving season, prices at the pump could rise more.