Slow economic growth will likely keep inflation at bay into 2009, but markets likely have not yet experienced the full fallout from the "financial storm" that began roughly a year ago,

Federal Reserve

Chairman Ben Bernanke said Friday.

Cheaper commodity prices and a strengthening dollar have given merit to the Fed's decision to hold its target rate at 2%, despite more dire inflationary threats earlier this year, Bernanke said. But the Fed chief did not paint a sunny picture, predicting economic softness and further pressures to come in the financial markets.

"Although we have seen improved functioning in some markets, the financial storm that reached gale force ... has not yet subsided," Bernanke said at the Federal Reserve Bank of Kansas City's Annual Economic Symposium in Jackson Hole, Wyo., "and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment."

Bernanke also noted that the inflation outlook is "highly uncertain." If commodity prices continue to soften, it would be good news for inflation, which has reached the highest level in decades for consumers and producers alike. However, Bernanke noted that part of the reason oil and other commodities have become cheaper is that the market believes that economic growth is "likely to fall short of potential for a time."

Following Bernanke's comments, the

Dow Jones Industrial Average

added more than 180 points, while the

S&P 500

gained nearly 12 points.

The Fed chief also noted that the government-supported

JPMorgan Chase

(JPM) - Get Report

acquisition of

Bear Stearns

was "necessary and justified under the circumstances." Bernanke took pains to stomp out the perception that the government will bail out every ailing institution, noting that such a strategy would only lead to further risk-taking and a greater threat to the system.

Regulators are contemplating sweeping regulation to better monitor the financial institutions that are causing the economic slump, according to Bernanke's comments.

They are reviewing issues and practices that could cause market meltdowns similar to the Bear Stearns crisis, including leveraged loans, risk management and liquidity practices. Instead of looking at each institution in isolation, regulators are performing a "fully integrated overview of the entire financial system" and considering the performance of stress tests across a range of firms and markets, Bernanke said.

The regulatory approach that could come to fruition would be "daunting indeed," he noted, in terms of costs, technical aspects and achieving a quorum among domestic and international regulators, as well as the firms being reviewed.

Even if successful, the Fed chief said, "such an approach would never eliminate financial crises entirely."

Tony Crescenzi, chief bond market strategist at Miller Tabak and a

RealMoney.com

contributor, said Bernanke's comments about redrawing the country's financial system were "important" and will have "major implications for the construct of the system in the months and years to come." However, with a lack of specificity and definitiveness about such plans, the remarks were "not an issue for today's trading."