Federal Reserve Chairman Ben S. Bernanke said the U.S. economy faces "formidable headwinds," including a weak labor market and tight credit that are likely to produce a "moderate" pace of expansion.

"The economy confronts some formidable headwinds that seem likely to keep the pace of expansion moderate," Bernanke, 55, said today in the text of remarks to the Economic Club of Washington. He said inflation remains "subdued" and might even move lower.

Stocks rose and the dollar erased its gain against the euro after Bernankes comments as traders pared bets the Fed will raise interest rates from a record low in August. Bernanke has led the most aggressive monetary stimulus in U.S. history, expanding the Feds balance sheet by $1 trillion and cutting the benchmark lending rate a year ago close to zero.

The Standard & Poors 500 Index was up 0.2 percent to 1,108.35 at 1:05 p.m. in New York. The dollar was little changed at $1.4853 per euro after rising as much as 0.7 percent.

"Despite the general improvement in financial conditions, credit remains tight for many borrowers," and the job market "remains weak," Bernanke said.

The economy grew at a 2.8 percent annual rate in the third quarter, and a report last week showed unemployment fell to 10 percent in November from 10.2 percent the previous month.

The Fed chairman said the U.S. central bank has the tools and commitment to keep price increases in check, and that inflation could subside further.

Inflation 'Subdued' "Elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here," Bernanke said. "The Federal Reserve is committed to keeping inflation low and will be able to do so."

The Fed chairman credited the U.S. central bank with pulling the economy "back from the brink," and suggested that growth is unlikely to be strong enough to lower unemployment at a rapid pace. The speech was his first since his appearance at a Senate Banking Committee hearing last week on his nomination to a second term.

"We still have some way to go before we can be assured that the recovery will be self-sustaining," the Fed Chairman said. "My best guess at this point is that we will continue to see modest economic growth next year—sufficient to bring down the unemployment rate, but at a pace slower than we would like."

Commercial Paper The Fed has channeled liquidity to banks and markets for asset-backed securities and the commercial paper market, helping to unfreeze bank funding markets. The London interbank offered rate, or Libor, for three-month loans in dollars between banks was 0.25 percent today, down from 1.42 percent at the start of the year.

The central bank is also purchasing $1.25 trillion in mortgage-backed securities. Costs on 30-year fixed-rate mortgages fell to 4.71 percent Dec. 3, the lowest since mortgage buyer Freddie Mac (FRE) in McLean, Virginia, began compiling the data in 1971.

The Fed chairman cited the benefits of the central banks regional structure, saying it is "well suited" to be the lead regulator for supervising the largest financial institutions.

"No firm, by virtue of its size and complexity, should be permitted to hold the financial system, the economy, or the American taxpayer hostage," Bernanke said. "All systemically important financial institutions, not only banks, should be subject to strong and comprehensive supervision on a consolidated, or firm-wide, basis."

Great Depression Buff The former Princeton University scholar and self-described Great Depression buff is defending the central bank against efforts in Congress to curtail its authority and independence.

A Senate proposal would remove bank supervision from the Fed, and House legislation would increase oversight of monetary policy. Legislation pending in both chambers would limit the Feds ability to lend to troubled institutions and remove the central banks rule-writing authority on consumer financial products.

The Fed chairman has prompted concern among lawmakers about taxpayer-sponsored bailouts and rescues that he says were used only to save households and the economy from financial collapse.

The House on Nov. 19 advanced a proposal to remove a three- decade ban on congressional audits of Fed interest-rate decisions, a measure backed by Ron Paul, a Republican from Texas.

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