Federal Reserve Chairman Ben S. Bernanke said the economy is atrisk from Europe's debt crisis and the prospect of fiscaltightening in the U.S., while refraining from discussing steps thecentral bank might take to protect the expansion.

“The situation in Europe poses significant risks to the U.S.financial system and economy and must be monitored closely,”Bernanke said today in testimony to the Joint Economic Committee inWashington. “As always, the Federal Reserve remains prepared totake action as needed to protect the U.S. financial system andeconomy in the event that financial stresses escalate.”

Bernanke also warned lawmakers that “a severe tightening offiscal policy at the beginning of next year that is built intocurrent law — the so-called fiscal cliff — would, if allowed tooccur, pose a significant threat to the recovery.”

Bernanke on June 19-20 will lead the Federal Open MarketCommittee in a policy-setting meeting confronting the slowestemployment growth in a year and a worsening debt crisis in Europe.The U.S. added 69,000 jobs last month, the fewest in a year, evenas the Fed maintained record stimulus.

In his prepared comments, the 58-year-old Fed chairman didn'tcall for consideration of additional stimulus, a contrast withspeeches yesterday in which Vice Chairman Janet Yellen said theeconomy “remains vulnerable to setbacks” and may warrant moreaccommodation. Two regional Fed bank presidents who vote on policythis year, San Francisco's John Williams and Atlanta's DennisLockhart, said the Fed should be prepared to take action if theeconomy deteriorates further.

U.S. stocks pared gains after Bernanke's statement. The Standard& Poor's 500 Index was up 0.5 percent to 1,321.61 at 10:11 a.m.after earlier rising as much as 1.1 percent. The yield on the10-year Treasury was little changed at 1.66 percent.

Bernanke, 58, echoed language from recent Fed statements, sayingthat the central bank “reviews the size and composition of itssecurities holdings regularly and is prepared to adjust thoseholdings as appropriate to promote a stronger economic recovery ina context of price stability.”

The Fed has already purchased $2.3 trillion of securities in tworounds intended to lower borrowing costs and spur hiring. A programknown as Operation Twist lengthening the maturities of the Fed'sassets is due to expire this month.

Fisher, Bullard

More easing isn't necessary, Dallas Fed President Richard Fisherand St. Louis Fed President James Bullard said in separate speecheson June 5. Additional stimulus would be “pushing on a string,”Fisher said, while Bullard said there's time to assess the economyand no need to change policy now. The two regional bank chiefsdon't vote on policy this year.

The central bank said yesterday in its Beige Book businesssurvey that the U.S. economy maintained a moderate pace of growthfrom early April to late May as factory output rose and thereal-estate market improved.

“Economic growth appears poised to continue at a moderate paceover coming quarters, supported in part by accommodative monetarypolicy,” Bernanke said today. “In particular, increases inhousehold spending have been relatively well sustained.”

The outlook for inflation is “subdued,” and price increases willprobably remain at or slightly below the 2 percent level that's inline with the FOMC's goal to meet its dual mandate of stable pricesand maximum employment, Bernanke said. Higher unemployment andretreating oil and gas prices “should continue to restraininflationary pressures,” he said.

Bernanke used his appearance before lawmakers to urge them toput fiscal policy on a “sustainable path” while avoiding a “severetightening” in spending just now that could hamper the economicrecovery.

A smoother transition in government spending would help promotefull employment, which would be supportive of fiscal accounts, hesaid, while a credible long-term budget plan “could help keeplonger-term interest rates low and improve household and businessconfidence.”

Bernanke also elaborated on his views about the crisis inEurope, saying it was “acting as a drag on our exports, weighing onbusiness and consumer confidence, and pressuring U.S. financialmarkets and institutions.”

European policy makers will likely need to take additional stepsto stabilize their banks, calm their markets, and create a“workable” fiscal framework, Bernanke said.

ECB Rates

European Central Bank President Mario Draghi said yesterday thatECB policy makers discussed cutting interest rates to a record low,fueling expectations they'll act as soon as next month as theintensifying debt crisis curbs growth.

“We monitor all developments closely and we stand ready to act,”Draghi told reporters in Frankfurt after the ECB left its benchmarkrate at 1 percent. Risks to the economic outlook have increased and“a few” of the ECB's Governing Council members called for rate cutat yesterday's meeting, he said.

Minutes of the FOMC meeting on April 24-25 showed policy makerssaid a loss of momentum in growth or increased risks to theireconomic outlook could warrant additional action to preserve therecovery. Members “indicated that additional monetary policyaccommodation could be necessary if the economic recovery lostmomentum or the downside risks to the forecast became greatenough,” the minutes showed.

The 69,000 jobs added in May was less than half the numberforecast by economists and the April total was revised down to77,000 from 115,000, Labor Department figures showed June 1. Theunemployment rate unexpectedly rose to 8.2 percent from 8.1 percentfor the first increase since June 2011.

“I am convinced that scope remains for the FOMC to providefurther policy accommodation,” Yellen said yesterday. “It may wellbe appropriate to insure against adverse shocks that could push theeconomy into territory where a self-reinforcing downward spiral ofeconomic weakness would be difficult to arrest.”

Atlanta's Lockhart said extending Operation Twist is an “optionon the table” and that policy makers can do more, while SanFrancisco's Williams said the Fed should be ready to step upstimulus in case economic growth slows and threatens to delayimprovement in the job market.

AT&T Inc. Chief Executive Officer Randall Stephenson said onJune 1 that smaller companies have reduced hiring as businessconditions get “tighter and tighter,” reducing demand for thelargest U.S. phone company's services.

Dallas-based AT&T expects the economy to expand by 1 percentin the second half of 2012 in “our best case” scenario, Stephensonsaid at a conference.

Not Seeing Hiring

“New business starts down at the bottom end are still innegative territory, and until we see that begin to tick up, we'renot forecasting for ourselves any kind of change in trajectory ofthe current economic environment,” Stephenson said. We are “seeingno hiring, basically, that would drive our type of business.”

Concern the global economy is slowing drove down the Standard& Poor's 500 Index 6.3 percent in May for the biggest monthlyloss since September. The index rose yesterday by 2.3 percent to1,315.13 on signs central bankers are prepared to supportgrowth.

Investors seeking safety in U.S. government this month debt havepushed yields on 30-year and 10-year debt to record lows of 2.5089percent and 1.4387 percent, respectively.

JPMorgan Chase & Co. and Morgan Stanley say Fed policymakers are more likely to buy additional government-backed mortgagesecurities after the pace of U.S. job creation slowed.

Mortgage rates for 30-year U.S. loans have fallen to record lowsfor five straight weeks as concern about Europe's financial crisisattracts investors to U.S. government bonds that guide borrowingcosts. The average rate for a 30-year mortgage dropped to 3.75percent in the week ended May 31 from 3.78 percent, Freddie Macsaid. It was the lowest in the mortgage-finance company's recordssince 1971.

The S&P/Case-Shiller index of property values in 20 U.S.cities dropped 2.6 percent from a year earlier following a 3.5percent decline in February, the group reported May 29.

The number of Americans signing contracts to buy previouslyowned houses fell in April by the most in a year, the NationalAssociation of Realtors said May 30. Pending home resales dropped5.5 percent from March. They rose 15 percent from a yearearlier.

Bloomberg News

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