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Federal Reserve chairman Ben Bernanke warned the outlook for the US economy was "unusually uncertain" Wednesday but said the central bank could step in to bolster a faltering recovery.
Bernanke told US lawmakers the world's largest economy would see only "moderate growth, a gradual decline in the unemployment rate, and subdued inflation over the next several years."
Underlining the severity of the crisis, Bernanke warned private-sector hiring was still growing at "a pace insufficient to reduce the employment rate materially."
His comments kicked off two days of hearings in Congress, which is deeply divided over how to deal with high unemployment and a stuttering recovery.
With the unemployment rate running at 9.5* percent and amid fears of a looming double-dip recession, Bernanke came under pressure to further stimulate the recovery.
Responding to those demands, Bernanke said the Fed was "prepared to take further policy actions as needed."
"If the recovery seems to be faltering, then we will at least need to review our options," he added.
His comments mark a rapid turnaround for the central bank, which until recently had focused on how to wind down crisis measures that have left the Fed holding more than a trillion dollars in assets.
But as clamors have grown for a re-entry rather than an exit strategy, doubts have also grown about whether the Fed has any arrows left in its quiver.
The Fed has little room to cut already historically low interest rates and concerns about the soaring US deficit likely would make buying up more assets deeply unpopular.
But Bernanke insisted the Fed could act if necessary.
"We do still have options," he said, outlining four measures that could help stimulate growth, including buying new assets and lowering selected interest rates.
According to Geoffrey Yu of UBS, by lowering the interest rate for deposits held at the Fed, the central bank could help to stimulate lending, which has been tight since the current crisis began.
"The... hope is that banks would be incentivised to lend more into the wider economy rather than dump funds with the Fed," Yu said.
But Bernanke indicated any action was unlikely until it becomes clear that the economic recovery is not sustainable or self-propelling.
"We are going to continue to monitor the economy closely and continue to evaluate the alternatives that we have," Bernanke said.
"If the recovery is continuing at a moderate pace, the incentive would be less."
His comments appeared to offer little succor to investors worried about a double-dip recession.
"Although the outlook has become more uncertain, the Fed has not changed its policy stance in favor of further accommodation," said Michael Gapen of Barclays Capital. "We do not take a policy signal from this."
The Dow Jones Industrial Average closed down over 100 points, or one percent, after Bernanke made his remarks.
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