Bernanke: Economy better than expected

WASHINGTON -- Chairman Ben Bernanke told lawmakers yesterday that the U.S. economy has performed better in recent months than the Federal Reserve had expected. If the trend continues, he said, the Fed might have to reassess its outlook for a slow recovery.

Investors appeared to take Bernanke's more optimistic tone as a signal that the Fed is less likely to adopt further steps to boost growth. It could also mean the Fed could back off its plan to hold its key interest rate near zero until late 2014. Stocks and bond prices both fell.

Analysts said Bernanke's speech was notable for what it didn't include: any mention of a new round of government bond buying.

Speaking at a hearing of the House Financial Services Committee, Bernanke cautioned that the Fed doesn't expect the sharp drops in unemployment to continue this year and it plans to stick with its policy on interest rates.

Still, he said the Fed's late-2014 target for any increase in interest rates is tied to the economy's health and the Fed might have to adjust its target if the economic outlook improves.

"The policy is conditional," Bernanke said in response to a question on the topic. "It is based on what we know now."

A spike in inflation could also force the Fed to reconsider that policy. Gasoline prices are rising again. Bernanke said that will likely push inflation up temporarily while depressing consumers' purchasing power.

Still, he said that the Fed continued to believe that longer-term inflation would remain subdued. He said maintaining a policy that keeps rates low for an extended period "tended to put downward pressure on longer-term interest rates."

Some analysts took Bernanke's remarks to mean the Fed is less likely to buy more Treasury or mortgage bonds to try to drive down long-term rates.