Federal Reserve Chairman Ben Bernanke on Tuesday acknowledged the economy has slowed but offered no hint the U.S. central bank is considering any more stimulus to accelerate growth.
He also warned members of Congress who might be planning aggressive budget cuts that they have the potential to derail the recovery if cuts in government spending take hold too soon.
A recent spate of weak economic data, capped by Fridayâ€™s report showing anemic job creation last month, had renewed speculation the Fed might again come to the economyâ€™s aid.
Bernanke gave no such indication but did say the recovery was fragile enough to warrant keeping in place the extraordinary monetary support the Fed has already provided.
Speaking to a banking conference, the Fed chairman said that while he expects the economy to strengthen in the second half of the year, the job market bears close monitoring.
â€œThe economy is still producing at levels well below its potential,â€ he said. â€œConsequently, accommodative monetary policies are still needed.â€
Richard Gilhooly, an interest rate strategist at TD Securities in New York, called the speech â€œpretty downbeat.â€
â€œIt means that the Fedâ€™s on hold for longer,â€ he said.
Stocks closed lower after Bernankeâ€™s sober assessment, while longer-term bonds erased losses.
Bernanke repeated his view that a spike in U.S. inflation, while worrisome, should prove fleeting as commodity prices moderate. In addition, weak wage growth and stable inflation expectations should help keep prices down, he said.
On the budget, Bernanke repeated his call for a long-term plan for a sustainable fiscal path but warned politicians against massive short-term cuts in spending. â€œA sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery,â€ he said.
â€œBy taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk,â€ he said.
All Tapped Out
The central bank has already slashed overnight interest rates to near zero and purchased more than $2 trillion in government bonds to pull the economy from a deep recession and spur a recovery.
With the central bankâ€™s balance sheet already bloated, officials have suggested there would be a high bar for any further Fed easing. The Fedâ€™s current $600 billion round of government bond buying, known as QE2, is due to end this month.
Sharp criticism in the wake of QE2 is one factor likely to make policymakers reluctant to push the limits of unconventional policy.
â€œQE3 is still not an option right now, more because of the political ramifications,â€ said Kathy Lien, director of currency research at GFT in New York. â€œWe need to see much more significant deterioration in the economy and consistent weakness in non-farm payrolls before that can happen.â€
In a Reuters poll of U.S. primary dealer banks conducted after the employment data, analysts saw only a 10 percent chance for more government bond purchases by the Fed. They also pushed back the timing of an eventual rate hike further into 2012.
Hurdles to better economic health have emerged overseas as well. Europe is struggling with a debt crisis, while Japan still reels from the effects of the earthquake and tsunami.
In emerging markets, China is trying to rein in red-hot growth to prevent inflation.
Fed policymakers have admitted to being surprised by how weak the economy appears, but none have yet called for more stimulus.
In an interview with the Wall Street Journal, Chicago Federal Reserve Bank President Charles Evans, a noted policy dove, said he was not yet ready to support a third round of so-called quantitative easing. His counterpart in Atlanta, Dennis Lockhart, also said the economy was not weak enough to warrant further support.
While Boston Fed President Eric Rosengren told CNBC on Monday the economyâ€™s weakness might delay the timing of an eventual monetary tightening, the head of the Dallas Federal Reserve Bank, Richard Fisher, said the Fed may have already done too much.
Evans and Fisher have a policy vote on the Fed this year while Rosengren and Lockhart do not.