By Alister Bull and Pedro da Costa
WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke said on Wednesday the U.S. central bank still expects to start scaling back its massive bond purchase program later this year, but he left open the option of changing that plan if the economic outlook shifted.
While sticking closely to a time line to wind down the bond buying that he first outlined last month, Bernanke went out of his way in testimony to Congress to stress that nothing was set in stone.
"Our asset purchases depend on economic and financial developments, but they are by no means on a preset course," he said in remarks prepared for delivery to the House of Representatives Financial Services Committee.
The remarks pushed up U.S. stock futures and government bond prices, while the dollar softened against the euro and the yen.
"There is something in these comments for everybody," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "Bernanke has done a good job of leaving himself plenty of maneuver room in terms of policy."
Bernanke's semi-annual testimony to Congress, which may be his last if the chairman steps down when his term ends in January, as many expect, will be followed by a lengthy question and answer session with the committee's members when the hearing begins at 10 a.m. (1400 GMT). He appears again before the Senate Banking Committee on Thursday.
The Fed has held overnight interest rates near zero since December 2008, while more than tripling its balance sheet to about $3.46 trillion with a series of bond purchases. In its third and latest asset purchase program, it has been buying $85 billion in U.S. Treasury and mortgage-related bonds each month to drive down borrowing costs and spur investment and hiring.
Bernanke set off a brief but fierce global market sell-off last month when he outlined plans to reduce this quantitative easing program, and he has joined a slew of officials since then who have spelled out their intention to keep rates near zero well after the bond buying ends.
Under the timeline Bernanke laid out on June 19, Fed policymakers would likely reduce their monthly bond buys later this year and halt them altogether by mid-2014, as long as the economic recovery unfolds as expected.
In his remarks on Wednesday, Bernanke said the pace of asset purchases could be reduced "somewhat more quickly" if economic conditions improved faster than expected. On the other hand, the current pace "could be maintained for longer" if the labor market outlook darkened, or inflation did not look like it was rising back toward the Fed's 2 percent goal.
"Indeed, if needed, the (Fed's policy-setting) committee would be prepared to employ all its tools, including an increase (in) the pace of purchases for a time, to promote a return to maximum employment in a context of price stability," Bernanke said.
STILL EASY AFTER ALL THESE YEARS
While the end of the Fed's bond buying may be in view, Bernanke repeated that officials will keep rates near zero at least until the unemployment rate falls to 6.5 percent, as long as inflation remains in check. Most do not expect rates to rise until sometime in 2015.
He also said that the Fed would look closely at any decline in unemployment to see whether it was being driven by strength in hiring or a decline in the number of Americans looking for work, in which case the central bank would be more patient before raising rates.
Any rate hike cycle, he said, would be gradual.
Some Fed officials have been concerned about the low level of inflation, with the central bank's preferred price gauge running well below its target.
Data on Tuesday, however, showed that inflation firmed last month, while confidence among home builders soared to a 7-1/2 year high this month.
On Thursday, however, the government said groundbreaking for homes fell to a 10-month low. In addition, retail sales were weak in June, and second-quarter GDP is expected to come in at around a dismal 1 percent annual rate, painting a very mixed picture for Fed policymakers.
Bernanke said the economic recovery was continuing at a moderate pace thanks to a stronger housing sector, which was helping conditions in the labor market improve gradually.
He also repeated that the Fed felt the risks to the economy had decreased since the fall.
But he said higher taxes and cuts in federal spending could still turn out to exert a larger drag on U.S. growth than expected, and that worsening conditions overseas could hurt conditions back home.
"With the recovery still proceeding at only a moderate pace, the economy remains vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated," he said.
(Additional reporting by Paige Gance in Washington and Nick Olivari in New York; Editing by Neil Stempleman and Tim Ahmann)