Federal Reserve Chairman Ben S. Bernanke told Congress that the central bank isn't currently ready to embark on a third round of government bond-buying to stimulate the economy.

"We're not prepared at this point to take further action," Bernanke said today, in response to a question from Senate Banking Committee Chairman Tim Johnson, a Democrat from South Dakota. Johnson asked Bernanke why the Fed wasn't immediately starting a new stimulus program given the weak economic recovery and rising unemployment.

Stocks fell, driving the Standard & Poor's 500 Index to the lowest level of the month. The S&P declined 0.7 percent to 1,308.25 at 1:18 p.m. in New York after rising as much as 0.7 percent. Gold futures pared gains after reaching a record $1,594.90 an ounce.

In House testimony yesterday, he said the Fed still has tools to spur growth, and that "we have to keep all the options on the table," driving share prices higher. Bernanke told Senators today that policy makers want to see if the economy rebounds as anticipated in the coming months, and that they are keeping a close eye on inflation.

Should the economy turn out to be weaker than expected, the central bank may provide more monetary stimulus, Bernanke said. A third round of quantitative easing, or QE3, is an option if a recent economic slowdown persists and deflationary forces re- emerge, he said.

When Necessary

"We just want to make sure that we have the options when they become necessary," Bernanke said. "But, at this point, we're not proposing to undertake that option."

Bernanke said the Fed faces conditions that are different today than they were last August, when he signaled a second round of large-scale asset purchases. At that time, the economy was in danger of stalling, he said, and the Fed was concerned the country may experience deflation, a widespread and prolonged drop in prices, wages and the values of assets such as homes and stocks.

"Today the situation is more complex," Bernanke told lawmakers. "Inflation is higher. Inflation expectations are close to our target," he said. "We are uncertain about the near-term developments in the economy. We'd like to see if, in fact, the economy does pick up, as we are projecting."

David Fuller's view In yesterday's opening statement Mr Bernanke mentioned several measures that the Fed could take to provide a further stimulus for the US economy, including the purchase of longer-dated government bonds. This encouraged investors to conclude that QE3 was right around the corner. Yesterday, stocks and precious metals rallied; bond yields fell. Stocks and bonds reversed those moves today, following Mr Bernanke's concluding statements, and precious metals pared gains.

The Fed will hope to avoid QE3, which would be very controversial and also underline that both QE1 and QE2 had fallen short of their intended and predicted impact on the US economy. Mr Bernanke and his colleagues at the Fed, plus the Democrat administration, not to mention plenty of concerned investors will now watch nervously over the next few months to see: a) If the economy really does strengthen, and b) If commodity-driven inflationary pressures really do fall back, as he has predicted again today.

He may get one right but almost certainly not both. The US economy could improve somewhat but it is a close call as Euroland's debt woes and high commodity prices remain headwinds. An improving US economy would add to rather than diminish prospects for higher commodity prices and weather conditions were certainly not benign this spring, adding to harvest concerns.

Mr Bernanke would be delighted with a stronger economy, even if his forecast for lower inflationary pressures fails to materialise. He could begin the process of normalising interest rates and claim victory over deflation. If the economy remains soft and unemployment high, he will be under pressure to do more in the run-up to the presidential election.