Fed Concerned About Pace of Economic Growth

WASHINGTON -- (TheStreetFederal Reserve Chairman Ben Bernanke continues to expect moderate economic growth, gradual improvements to the unemployment rate and subdued inflation, but said that Fed policymakers consider the current uncertainty surrounding the job market and economic growth prospects to be "greater than normal."

Moreover, members of the Federal Open Market Committee have deemed risks to growth as more heavily weighted to the downside.

Federal Reserve Chairman Ben Bernanke

Delivering his testimony on the semiannual monetary policy report before the Committee on Banking, Housing and Urban Affairs in Washington on Wednesday, Bernanke blamed financial conditions that are no longer as supportive of growth, as eurozone debt levels negatively impacted investors' risk appetites.

Stocks, which had been paring losses and trading near the flat line by midday on Wednesday, extended their losses after Bernanke's statement. The Dow closed with a triple-digit loss, and other major U.S. averages finished the session down by more than 1%.

Doug Roberts, chief investment strategist at Channel Capital Research, said the Fed's elaboration into the Treasury situation was notable. According to the statement: "Proceeds from maturing Treasury securities are being reinvested in new issues of Treasury securities with similar maturities."

Bernanke said the committee may eventually want to shift the reinvestments into shorter-term maturities to bring the average maturity of Treasury holdings closer to pre-crisis levels, but currently, "no decision to change reinvestment policy has been made."

"If you go back to the June 23rd statement, the Fed was largely silent on what they've been doing with Treasuries," Roberts said. "You'd have to go back to an earlier statement to see implications that they're working on phasing out the program, but if they're sitting there, continuing to buy Treasuries, then that could be seen as continued quantitative easing and contrary to expectations that such accommodative policies were being phased out."

"While they're not increasing the program, they're also not ready to completely phase it out, which may account for why markets dropped off because investors saw it as a sign that the economy must really be weak."

Bernanke restated the FOMC's recently downgraded forecast for real gross domestic product growth of 3%-3.5% in 2010 and 3.5%-4.5% in 2011 and 2012. Progress in job growth is also now expected to be more sluggish than previously thought, with the unemployment rate unlikely to fall to the 7%-7.5% range until the end of 2012.

As expected, Bernanke reiterated the oft-repeated assurance that the FOMC continues to believe that economic conditions will warrant an exceptionally low target interest rate for an extended period of time because inflationary pressures aren't a near-term concern.

Even as the Fed chairman acknowledged that accommodative policies will eventually have to be unwound to ward against the buildup of inflationary pressures, Bernanke said that because the outlook is so uncertain, the committee will keep a close eye on economic developments and remains ready "to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability."

Much of the statement rehashed the FOMC's June statement, but Bernanke did applaud President Barack Obama for the new financial reform legislation signed earlier on Wednesday.

"I believe that the legislation, together with stronger regulatory standards for bank capital and liquidity now being developed, will place our financial system on a sounder foundation and minimize the risk of a repetition of the devastating events of the past three years," Bernanke said.

-- Written by Melinda Peer in New York.

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