Fed will act if recovery stumbles

WASHINGTON (Reuters) – Federal Reserve Chairman Ben Bernanke renewed his promise on Thursday that the central bank could put more monetary stimulus into play if the economic recovery stumbles.

On the second day of delivering the Fed’s semiannual monetary policy report to Congress, Bernanke is also expected to repeat his warning that a debt default would be devastating for the U.S. and the global economy.

Moody’s ratings agency warned late on Wednesday that the U.S. could lose its top credit rating in coming weeks if a standoff between the White House and congressional Republicans over raising the statutory borrowing limit is not resolved.

Bernanke’s comments to the Senate Banking Committee closely reflect remarks delivered to a House of Representatives panel on Wednesday.

Economic reports released on Thursday offered mixed signals about the path of the world’s largest economy, which grew at a tepid 1.9 percent annual rate in the first three months of the year and is not expected to expand much more quickly in the second quarter.

Retail sales rose in June, and claims for unemployment benefits fell last week. However, last month’s producer prices posted their steepest decline since February 2010 as energy prices eased.

While Fed policymakers have been worried about rising inflation, the risk of a damaging deflationary spiral could force the central bank to act to promote growth.

A separate report showed business inventories rose in May as sales posted their first drop in almost a year.

Although Bernanke said the Fed’s $600 billion bond buying program has been effective in lowering long-term interest rates and coaxing investors to take greater risks, it has been controversial.

“I believe the stage is set for a resurgence of inflation if the Fed is not careful,” Senator Richard Shelby told Bernanke at the hearing.