Bernanke looks past January jobs report

WASHINGTON (MarketWatch) � Federal Reserve Board Chairman Ben Bernanke did not throw the spotlight Tuesday on last week�s surprisingly strong January unemployment report, sticking to his forecast only moderate growth ahead.

In testimony to the Senate Budget Committee, Bernanke said the Fed was not forecasting any �sharp improvements� in the unemployment rate.

While he was not asked specifically if the job report impact Fed monetary policy, Bernanke said that the 8.3% unemployment rate reached in January, the lowest in almost three years, �understates the weakness of the labor market in some broad sense.� See live-blog of Bernanke hearing.

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�We�re looking still at a couple more years of recovery,� Bernanke said at another point.

�We see growth at something close to potential which, under normal circumstances, would mean that we�re creating enough jobs to employ new entrants to the labor force but not making sharp improvements on the unemployment rate,� Bernanke said.

Dan Greenhaus, chief global strategist at BTIG LLC, said Bernanke�s �pretty dovish� testimony cheered financial markets.

�If you believe Bernanke, and by extension the Fed, is continuing its easing bias, well then you�ve got an improved economic backdrop and a super accommodative Fed. All else equal, that supports higher prices and that�s what we�re seeing,� Greenhaus said.

Stocks stayed in positive territory after Bernanke started speaking. The Dow Jones Industrial Average DJIA �was recently up 25 points to 12,868.

The Fed said last month that it plans to hold interest rates close to zero if the economy evolves as expected.

The statement was designed in part to keep interest rates from rising quickly at the first signs of recovery as higher rates could choke off the nascent improvement.

After the stronger-than-expected jobs data Friday, Fed fund futures declined, in effect seeing the first rate hike in the summer of 2014.

In other remarks, Bernanke denied that the Fed would tolerate higher inflation to try to foster better near-term economic conditions.

�We are not going to seek higher inflation in order to advance unemployment,� Bernanke said.

He acknowledged that the Fed zero-rate policy was designed to move investors from �very conservative� positions �slightly more into riskier positions that involve investment and lending� that will strengthen the economy.

But this can go too far, he said, and the Fed has a new team in place to watch out for bubbles.

Bernanke told the committee that fiscal policy now in place - which would see tax hikes and spending cuts at the beginning of next year - would �indeed slow the recovery.�

Congress must not ignore longer-term debt woes if it moves to address the contractionary nature of short-term policy, he said.

investors and business may become concerned about the looming deficit contraction unless Congress sets out a clear �road map,� he said.

�The U.S. federal deficit will become unsustainable within 15 or 20 years at the most and possibly some of those effects will be even brought forward by markets,� Bernanke said.

The Fed chairman said that U.S. banks and money-market mutual funds have made progress reducing their exposures to Europe but said a major problem would still �have a powerful impact on our financial system.�