JACKSON HOLE, Wyo.—Federal Reserve Chairman Ben Bernanke Friday said the central bank stands ready to provide further support to a persistently weak economy, but didn't indicate any move was imminent despite fresh signs of feeble growth.
In a much-anticipated speech to global monetary policymakers gathered in Wyoming, Mr. Bernanke didn't elaborate on the central bank's remaining tools to boost the economy, which could have been a sign that the Fed was leaning toward action. Instead, he said the Fed would extend its mid-September meeting to two days to discuss options the central bank could pursue.
"The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability," Mr. Bernanke said.
The Dow Jones Industrial Average opened lower and fell as much as 221 points right after Mr. Bernanke's comments. But stocks pared losses and turned higher midmorning as some market participants applauded the Fed's measured approach.
Bond investors, however, bought safe-harbor Treasury bonds amid rising fears that the U.S. economy is headed into a recession, sending prices on the benchmark 10-year note higher. The speech delivered the stimulus-withered dollar a reprieve, sending it higher against rivals such as the Swiss franc and euro.
The latest sign of trouble for the economy came Friday as the Commerce Department revised down its already low estimate for second-quarter growth in gross domestic product. The economy grew by annual rate of only 1% in April through June, not the 1.3% rise that was previously estimated. That was after GDP increased by just 0.4% in the first three months of the year.
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Mr. Bernanke said the U.S. recovery, now more than two-and-a-half years old, continues to be "modest." He conceded the pace of growth has been slower than what the Fed expected. But he was more optimistic about the long run, saying the economy hasn't been permanently scarred by the financial crisis.
"Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years," the Fed chief told the gathering, which this year focuses on long-term growth prospects for the global economy.
U.S. banks are much healthier now, manufacturing has risen 15% since its trough and households have made progress in repairing their balance sheets, Mr. Bernanke noted. Still, he warned that financial stress continues to be a significant drag on the recovery both in the U.S. and abroad.
A recent round of weak data has raised fears the economy may slip into recession again, leading investors to hope Mr. Bernanke would use the Kansas City Fed's annual summer retreat to open the door to a new round of monetary stimulus. A year ago, Mr. Bernanke used his Jackson Hole speech to signal the Fed could launch a second round of bond purchases, or quantitative easing, as it eventually did in November.
A changed economic landscape—especially higher inflation—is forcing Mr. Bernanke to be more cautious with what would be part three of quantitative easing, or QE3. In August 2010, the economic outlook had deteriorated and inflation was falling. Now, while the economy is still weak, several indicators of inflation remain above the Fed's informal target of 2%.
Mr. Bernanke said he expects inflation to settle at or below a 2% rate following the moderation in the price of oil and other global commodities.
Mr. Bernanke said Fed policy can't do much for the economy's long-run trend and urged Congress to fix the budget deficit in a way that doesn't hinder the economy. He said the U.S. needs a better fiscal decision-making progress.
For more than a year, Mr. Bernanke has been urging Congress to use government tax and spending policies to provide short-term stimulus to the economy, tied together with a credible plan to bring down the deficit in the long run.
Write to Luca Di Leo at luca.dileo@dowjones.com
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