The upshot of Fed Chairman Ben S. Bernanke's testimony before the Senate Committee on Banking, Housing, and Urban Affairs on Tuesday was "don't expect much."

Bernanke reiterated the Federal Reserve's intention to keep interest rates low for the next two years, and included perfunctory language about being prepared to act if the situation worsens, but there was no indication that more dramatic action (like asset purchases or an announcement that the Fed will tolerate more inflation to allow unemployment to fall) is forthcoming:

Economic growth is also being supported by the exceptionally low level of the target range for the federal funds rate of 0 to 1/4 percent and the Committee's forward guidance regarding the anticipated path of the funds rate. As I reported in my February testimony, the FOMC extended its forward guidance at its January meeting, noting that it expects that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee has maintained this conditional forward guidance at its subsequent meetings. Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to the economic outlook, the Committee made clear at its June meeting that it is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

Bernanke noted that a deterioration of Europe's economy could weaken the U.S. economy considerably and cause the Fed to reexamine this policy. He also advised Congress to take action to avoid the fiscal cliff while reducing the deficit in the long term:

That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken. The Congressional Budget Office has estimated that, if the full range of tax increases and spending cuts were allowed to take effect--a scenario widely referred to as the fiscal cliff--a shallow recession would occur early next year and about 1-1/4 million fewer jobs would be created in 2013.


The most effective way that the Congress could help to support the economy right now would be to work to address the nation's fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery.