"We will continue to do our best to add monetary policy support to the recovery," Bernanke said during a question-and-answer period following a luncheon address to the Economics Club of New York. But he added that "the ability of the Fed to offset headwinds is not infinite. We have certain tools. We have used our easiest tools."
In the "worst-case scenario" of massive federal spending cuts and expiring tax reliefs in the new year, if Congress and President Obama fail to agree on a deficit reduction plan, Bernanke said, "I don't think the Fed has the tools to offset that."
And, while "discord and delay" on a fiscal continues, U.S. businesses are putting off their own investment decisions, the Fed chief said.
"It is certainly true that businesses are very concerned about uncertainty, and that seems to be a drag on their businesses and investment decisions," including hiring, Bernanke said. He added that Europe's woes are also in that mix of business anxiety.
He said businesses have unused capabilities just now as they await an accord in Washington.
"There is important potential for the economy to strengthen significantly if there's a greater (amount) of certainty about where the country is going," he said.
Bernanke described a "range of possibilities" for dealing with the budget conundrum, but added that tighter fiscal policy will certainly outweigh state and local government spending and will therefore continue to be a "headwind" to the recovery and an impediment to faster growth.
"What the Fed will do," he said, "is continue its stated policy," which includes further purchases of mortgage-backed securities. Maintenance of current monetary policy would also help ensure the labor market's recovery, he said.
Indeed, raising interest rates will only occur once the recovery has "begun to strengthen," Bernanke said. "We want to be particularly sure not to take away any accommodation before the economy has established upward momentum."
In the interim, the Fed's policy-setting committee continues to consider ways to improve communications and possibly add to policy strategies, he said. That includes layering the current calendar-date guidance in communication with "specific numbers" on economic conditions that could trigger policy changes, he said.
And on the policy front, raising the Fed's interest payments on banks' reserves will be a "very important" method of future tightening, he said.
For now, "we will continue to consider" whether or not to eliminate this 25 basis-point interest payment in the Fed's easing efforts, he said. But he said estimates suggest its stimulative effect would be "very, very small."
Bernanke also warned that it could be "market disrupting" and that it would add to overnight interest rates by only about eight or nine basis points.
Turning to the housing market, Bernanke said it is "now playing a role in the recovery, as we hoped."
Low mortgage interest rates have combined with steep home price declines to yield "extensive affordability," he said.
"The housing market appears to be now moving in the right direction," Bernanke said. And that should affect mortgage lending positively, he added.
But although there is a lot of evidence that banks are beginning to expand their capacity and willingness to provide mortgage loans, barriers to more rapid growth in housing are "many and diverse," and there is no "magic bullet" that would dissolve them, he said.
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