US Federal Reserve Chairman Ben Bernanke reiterated Wednesday that the Fed stimulus could be wound down next year if economic growth remains steady as forecast.
But Bernanke warned that government spending cuts continue to threaten growth and that tapering the big bond-purchase program is "by no means" a "preset course".
In prepared testimony to Congress, Bernanke stressed that the end to the $85 billion-a-month quantitative easing (QE) program did not mean the Fed was ready to begin tightening monetary policy with interest-rate hikes.
With unemployment still high and falling slowly and inflation very low, he said, "a highly accommodative monetary policy will remain appropriate for the foreseeable future."
Bernanke repeated the path for the program that he laid out after the last policy meeting of the Federal Open Market Committee (FOMC) in June: that the Fed could begin cutting the bond investments later this year and end the program by mid-2014, if the economy grows as the FOMC members expect.
But, addressing the jump in bond yields that answered that plan, he doubled up his message that the stimulus taper did not mean the Fed was ready to tighten its ultra-low interest rates.
And he stressed that growth remained vulnerable, and that QE would remain in place if needed, or even expanded.
"I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course."
Indeed, he said, if inflation -- which the Fed wants to see at 2 percent -- stays much lower than that, and the jobless rate does not fall quickly enough from its current 7.6 percent level, bond purchases could be held at the current level or even increased if necessary.
The Fed has wrestled with an outsized jump in yields and market interest rates, by more than one percentage point, in the weeks since its path toward reeling in the stimulus became apparent in May.
Markets have tied the eventual drying up of easy-money injections to a likely rise in the benchmark federal funds interest rate, which has been near zero since the end of 2008.
The surge in rates, economists worry, could itself slow the recovery by slowing demand in the recovering housing sector, which has become a key contributor to growth.
Bernanke said the federal funds rate, now at 0-0.25 percent, would stay low "at least as long as" unemployment remains above 6.5 percent and inflation remains tame at 2 percent or below.
He stressed that even those numbers "are thresholds, not triggers" that would prod the FOMC to weigh changes to monetary policy, and not automatically result in a rate hike.
Wall Street welcomed Bernanke's efforts to tamp down expectations of stimulus tapering.
Five minutes into trade, the Dow Jones Industrial Average rose 0.23 percent, the broad-based S&P 500 gained 0.39 percent and the Nasdaq Composite Index added 0.28 percent.
Bernanke said the US economy continues to grow at a "moderate pace" despite being held back by deep federal government spending cuts that began in March.
The rebound in housing is a key contributor to the strength of the economy, he said, and is helping drive the fall in unemployment.
Even so, he said, the jobs situation is "far from satisfactory" and that rates of underemployment and long-term unemplyment "are still much too high."
Inflation remains subdued, he said, in part because of recent factors that are "likely to be transitory."
For the longer term, the FOMC expects inflation to rise to around 2 percent, which it considers a fair level as the economy builds up strength.
He said the economy has shown some resilience to spending cuts mandated by Congress to slice the fiscal deficit.
But Bernanke stressed that these could still hurt growth.
"The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect," he said.
In addition, he warned that Congress's fight over raising the country's borrowing ceiling, and other fiscal issues, could "evolve in a way that could hamper the recovery."