US Federal Reserve Chairman Ben Bernanke said on Friday the economic recovery has weakened more than expected and the Fed is ready to take further steps if needed to spur slowing growth.
Bernanke's comments, in an address to an annual conference of global central bankers held by the Fed, came as the government reported that economic growth in the second quarter was weaker than it had originally estimated.
With interest rates held at ultra-low levels since December 2008, the Federal Open Market Committee, the Fed's policy-setting body, has turned to other measures, pumping more close to $1.7 trillion into the economy.
"The committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly," Bernanke told the Fed conference, held in Jackson Hole, Wyoming.
He made clear, however, that the US central bank has not decided what would prompt additional easing.
"At this juncture, the committee has not agreed on specific criteria or triggers for further action," he said.
Bernanke said the US central bank's purchases of longer-term securities have been effective in lowering borrowing costs and that he believes the benefits of buying more such assets, if needed, would outweigh any disadvantages.
US stocks turned lower initially after Bernanke's comments but then recovered to trade about 1 percent higher, while US Treasury bond prices were lower, as was the U.S. dollar.
Bernanke also said other options to spur economic growth -- such as committing to hold interest rates exceptionally low for an even longer period than is currently priced in to financial markets, or raising the Fed's inflation targets -- would be less effective in the current environment.
He stressed that the high jobless rate remains a concern to policy makers, and said the Fed would be vigilant against deflation -- a dangerous downward spiral in prices that chills economic growth by making both businesses and consumers reluctant to make purchases-- even though it is not currently a risk in the United States.
"Because a further significant weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability," he said.
Investors and economists said Bernanke's remarks indicated that he favored more quantitative easing measures.
"It's not a foregone conclusion. There is still debate about whether it should be done or not," said Andrew Harding, a bond portfolio manager at PNC Capital Advisors, in Cleveland.
"Bernanke has not taken off the table more quantitative easing, specifically the buying of Treasuries outright, but it is unclear what would trigger that," Dana Saporta, economist at Credit Suisse in New York.
The Fed has promised to keep interest rates exceptionally low for an extended period to support the economy. In addition, it bought close to $1.7 trillion in assets to provide additional stimulus.
As economic data pointed to a weakening of the recovery in recent months, the Fed said after its August meeting it would reinvest maturing securities to hold its balance sheet at a steady level at more than double its pre-crisis size to support the recovery, rather than letting it shrink, as it had been doing.
Despite the rather sober tone of much of his remarks, which were unusually policy-heavy for a conference that tends to focus on loftier academic matters, Bernanke said he was confident the US recovery would not stall.
He said while the exit from recession was driven primarily by fiscal and monetary stimulus measures and inventory rebuilding by businesses, a "hand-off" to consumer demand appeared to be under way.
Bernanke also downplayed a sharp widening of the trade deficit, which was a drag on second-quarter gross domestic product. The economy expanded at a 1.6 percent annualized rate between April and June, the Commerce Department reported on Friday, revising down its initial estimate of 2.4 percent.
Bernanke blamed a slow recovery in the labor market for restraining incomes and hurting consumer confidence.
"The prospect for household spending depends to a significant extent on how the situation evolves," he said.
He noted conflicting signals in personal income data, which suggested consumers were indeed pulling back, but also a higher savings rate that could lead to firmer consumer spending down the line.
Holding out some hope for the beleaguered housing sector despite a terrible raft of recent data, Bernanke said falling prices and low mortgage rates should boost demand.