Chairman Ben Bernanke said the Federal Reserve is prepared to take further steps to lift the U.S. economy if it weakens. But he didn't signal any imminent action in testimony before a congressional panel Thursday.
Bernanke said the European debt crisis poses significant risks to the U.S. financial markets. He noted that U.S. unemployment remains high and the outlook for inflation subdued.
But Bernanke said that he expects economic growth to continue at a moderate pace this year.
"As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate," he told the congressional Joint Economic Committee.
The Fed could buy more bonds to lower long-term interest rates, which would encourage more borrowing and spending. Or it could extend its plan to keep short-term rates near zero beyond late 2014.
But most economists don't expect further moves at the Fed's next policy meeting June 19-20, despite some signals from other Fed members in recent days.
For one thing, long-term rates have already touched record lows. Even if rates did decline further, analysts say they might have little effect on the economy.
And Bernanke may face pressure not to pursue further stimulus before the November election because such steps could be perceived as helping President Barack Obama win re-election.
John Ryding and Conrad DeQuadros, economists at RDQ Economics, said there was nothing in the testimony to "tip Bernanke's hand" ahead of the June meeting of the Federal Open Markets Committee, the Fed's policy committee.
"Yes the Fed chairman said the Fed stands ready to act if Europe poses a threat to the U.S. financial system or the economy. However, he gave no specifics and essentially repeated the language from the FOMC statement," they wrote in a note to clients.
The economy added 252,000 jobs a month from December through February. Since then, job growth has slowed to a lackluster 96,000 a month. In May, U.S. employers added just 69,000 jobs -- the fewest in a year.
Bernanke said the Fed is still studying the most recent employment data to assess the health of the job market. Like many economists, Bernanke said an unusually warm winter might have accelerated some hiring that normally would have taken place in spring. That could have weakened hiring temporarily in the spring.
Still, he said some of the winter's hiring might have made up for excessive job cuts during the recession. If so, and if those companies have completed their "catch-up" hiring, then stronger economic growth might be needed to restore hiring to healthier levels, Bernanke said.
"That is the essential question we will have to look at," he told the panel.
The government reported last week that the economy grew at a sluggish annual rate of 1.9 percent the first three months of 2012. That is consistent with monthly job growth of around 90,000.
Paul Edelstein, an economist at IHS Global Insight, suggested that Bernanke didn't seem too worried by the weak hiring in May.
"His view is that it isn't a sign that the economy is falling apart," said Edelstein, who added that Bernanke's message to financial markets was: "Don't expect anything drastic from the Fed at the June meeting."
Edelstein said the Fed could extend a program, known as Operation Twist, for six more months. The program hasn't expanded the Fed's portfolio. But it has shifted $400 billion in short-term holdings into longer-term Treasury bonds. The idea has been to further drive down long-term interest rates, making mortgages, auto loans and other consumer and business loans more attractive.
The Fed's policy committee has been split between those who favor doing everything possible to strengthen the economy and reduce unemployment, and those more concerned about inflation risks.
On Wednesday, Janet Yellen, the vice chairman of the Fed, Dennis Lockhart, the head of the Atlanta regional Fed Bank, and John Williams, president of the San Francisco Fed bank, all expressed the view that the Fed may need to do more to provide support,
But Rep. Kevin Brady, R-Texas, warned against more bond buying at the hearing. He said it could raise the risks of inflation.
"It is my belief that the Fed has done all that it can do and has perhaps done too much," said Brady, vice chairman of the committee.