U.S. "close to faltering," Fed ready to act: Bernanke (Reuters)

WASHINGTON (Reuters) – The Federal Reserve is prepared to take further steps to help an economy that is "close to faltering," Fed chairman Ben Bernanke said on Tuesday in his bleakest assessment yet of the fragile U.S. recovery.

Citing anemic employment, depressed confidence, and financial risks from Europe, Bernanke urged lawmakers not to cut spending too quickly in the short term even as they grapple with trimming the long-run budget deficit.

He made clear that the U.S. central bank's policy committee considers inflationary pressures well under control and given high unemployment, would be ready to ease monetary conditions further following the launch of a new stimulus measure in September.

"The Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability," Bernanke told the Joint Economic Committee of Congress.

His language was firmer than the policy-setting Federal Open Market Committee's statement less than two weeks ago, when the Fed said it would monitor the outlook and was "prepared to employ its tools as appropriate."

Since then, uncertainty about the outcome of the euro zone's sovereign debt crisis has undermined U.S. business and consumer confidence and helped to slow economic growth. The business cycle monitoring group ECRI last Friday said that the U.S. economy is tipping into a new recession.

Asked whether another round of bond purchases, known as quantitative easing, was in store, Bernanke was noncommittal.

"We never take anything off the table because we don't know where the economy is going to go. We have no immediate plans to do anything like that," he said.

The prospect of further Fed support for the economy lifted U.S. stocks though, after the market saw selling early in the day, pushing the S&P 500 briefly dipping into bear market territory.

Andrew Tilton, economist at Goldman Sachs, said contagion from the European crisis is a serious risk, threatening to tighten credit availability in the United States and weaken exports to the region. "This impact is likely to slow the U.S. economy to the edge of recession by early 2012," he said.

Recent U.S. economic data has been mixed after a dismal August, with a key manufacturing survey showing an unexpected improvement, but the slightly better tone has not been sufficient to dispel fears of another downturn.

Fresh clarity on the state of the economy will come on Friday, when the Labor Department releases monthly employment figures. Economists in a Reuters poll forecast a paltry gain of 60,000 jobs for September, and Bernanke in his testimony offered little hope for much improvement.

"Recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead," he told the Joint Economic Committee of Congress.

FISCAL WARNING

Bernanke said government belt-tightening was likely to prove a significant drag on the world's largest economy, which averaged less than 1.0 percent annualized growth in the first half of the year.

"An important objective is to avoid fiscal actions that could impede the ongoing economic recovery," he said,

Stressing that higher inflation earlier in the year had not become ingrained in the economy, Bernanke argued price pressures will remain subdued for the foreseeable future.

That backdrop made it easier for the Fed to launch its latest monetary easing effort in September, when it announced it would be selling $400 billion in short-term Treasuries and using the proceeds to buy longer-dated ones.

Bernanke estimated the new policy would lower long-term interest rates by about 0.20 percentage point which he said was roughly equivalent to a half percentage point reduction in the benchmark federal funds rate. Already 10-year Treasury note yields are at multi-year lows of 1.83 percent, helping keep mortgage and corporate borrowing costs extraordinarily cheap.

"We think this is a meaningful but not an enormous support to the economy. I think it provides some additional monetary accommodation, it should help somewhat on job creation and growth. It's particularly important now the economy is close -- the recovery is close -- to faltering," Bernanke said.

"We need to make sure that the recovery continues and doesn't drop back and the unemployment rate continues to fall downward."

INFLATION VS JOBS

Republican lawmakers pressed Bernanke on whether the Fed's dual mandate for full employment and price stability meant that it had to make compromises on inflation. On the 2012 presidential campaign trail, Republican candidate, Texas Governor Rick Perry earlier said it would be "treasonous" for the Fed to add further money to the economy.

Bernanke was categorical in defending the Fed's record of price stability in recent decades. He noted inflation has averaged 2.0 percent during his tenure and blamed regulatory failures, not excessively low rates, for the financial crisis.

Some economists believe the central bank could announce more concrete targets for policy goals, by linking the path of rates directly to unemployment and or inflation.

In response to the financial crisis and recession of 2008-2009, the Fed slashed interest rates to effectively zero and more than tripled the size of its balance sheet to a record $2.9 trillion, buying bonds off banks balance sheets. Bernanke said this was not bailing out Wall Street, but was part of its mandate to provide price and financial stability.

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NKorea reported ready to halt WMD tests (AP)

By MANSUR MIROVALEV and FOSTER KLUG, Associated Press Mansur Mirovalev And Foster Klug, Associated Press – 2?hrs?25?mins?ago

MOSCOW – North Korean leader Kim Jong Il says his country is ready to impose a nuclear test and production moratorium if international talks on its atomic program resume, in Pyongyang's latest effort to restart long-stalled, aid-for-disarmament talks.

It remains to be seen, however, whether Kim's reported gesture at a summit Wednesday with Russian President Dmitry Medvedev will satisfy the most skeptical of the five other nations at talks meant to end the North's nuclear weapons ambitions — the United States, South Korea and Japan.

Kim, at the summit in eastern Siberia, reportedly made no mention of an issue that lies at the heart of negotiators' worries: North Korea's recently revealed uranium enrichment program.

Medvedev spokeswoman Natalya Timakova was quoted by the ITAR-Tass news agency as saying that Kim expressed readiness to return to the nuclear talks without preconditions, and, "in the course of the talks, North Korea will be ready to resolve the question of imposing a moratorium on tests and production of nuclear missile weapons."

The North promised to freeze its long-range missile tests in 1999, but has since routinely tested short-range missiles and launched a long-range rocket in April 2009. It has also conducted two nuclear tests, most recently in 2009, and last year it shelled a South Korean front-line island, killing four, and allegedly torpedoed a South Korean warship, killing 46.

Kim and Medvedev met at the hotel of a military garrison near the city of Ulan-Ude in Buryatia, a predominantly Buddhist province near Lake Baikal. It is Kim's first trip to Russia since 2002, and it follows a marked easing in tensions between North and South Korea.

Nuclear envoys from the Koreas met last month on the sidelines of a regional security summit for what were described as cordial talks. A senior North Korean official then traveled to New York for talks with his U.S. counterparts.

The North has repeatedly said it wants the so-called six-party nuclear talks to resume. Washington and Seoul, however, have been wary, calling first for an improvement in the abysmal ties between the Koreas and for a sincere sign from the North that it will abide by past commitments it has made in previous rounds of the nuclear talks.

South Korea's Yonhap News Agency said in an editorial that many had hoped the summit would signal change for the tense Korean peninsula, but the results instead seemed a "'storm in a teacup,' lacking any new content."

"The communist country has a track record of alternately using provocations and dialogue with South Korea, the United States and other regional powers to try to wrest concessions before backtracking on agreements and quitting the nuclear talks," the editorial said of the North.

Yonhap quoted an unnamed South Korean official as saying the results fell short of the expectations of South Korea, the United States and Japan. The official raised the need for the North to address its uranium enrichment program.

The six-sided nuclear talks involving North Korea and the United States, China, Japan, Russia and South Korea have been stalled since December 2008. But faced with deepening sanctions and economic trouble, North Korea has pushed to restart them.

Yang Moo-jin, a professor at the University of North Korean Studies in Seoul, hailed the North's willingness to freeze its missile and nuclear tests, but noted there was no clear mention of the North's uranium enrichment program, which can also make nuclear weapons.

"The North already has weaponized plutonium, and enriched uranium is something that can be proliferated in an easier manner," Yang said.

On another subject, Medvedev said Russia and North Korea moved forward on a proposal to ship natural gas to South Korea through a pipeline across North Korea.

North Korea had long been reluctant to help its powerful archenemy increase its gas supply, but recently has shown interest in the project. The South wants Russian energy but is wary of North Korean influence over its energy supply.

Medvedev, in televised comments, said the two countries will create a commission on "bilateral cooperation on gas transit."

He said two-thirds of the 700-mile (1,100-kilometer) pipeline would traverse North Korea to stream up to 10 billion cubic meters of gas a year to the South. Russia's state-controlled gas monopoly, Gazprom, said the pipeline is likely to carry gas from the giant offshore fields near the Pacific island of Sakhalin.

The two leaders also discussed restructuring North Korea's Soviet-era debt to Russia, said a Kremlin official, speaking on condition of anonymity. That debt totals about $11 billion, according to a top Russian official.

The North's launching of a long-range rocket in April 2009 drew widespread international sanctions and condemnation, and an angry North Korea retaliated by pulling out of the six-party nuclear talks.

North Korea is believed to have enough weaponized plutonium for at least six atomic bombs and last November it revealed a uranium enrichment program. North Korea has carried out two nuclear tests, in 2006 and 2009, and is believed to be working toward mounting a bomb on a long-range missile.

In March, Russian Deputy Foreign Minister Alexei Borodavkin traveled to Pyongyang and urged North Korean officials to impose a moratorium on nuclear and ballistic missile tests and to allow international monitors back into its main nuclear complex near the capital.

Kim was expected to return to North Korea following his meeting with Medvedev.

The itinerary for Kim's visit has been largely kept secret due to security worries. Some photos of Kim emerged during his visit Sunday to a Russian hydroelectric plant — whose power lines might be extended to North Korea — but heavy police cordons have kept the media and onlookers in Ulan-Ude away from the train station.

Kim also reportedly visited a major aircraft factory that produces the Sukhoi attack planes and the town of Skovorodino, the starting point for an oil pipeline that links eastern Siberian oil fields to China.

At their summit, Medvedev greeted Kim, who stepped out of an armored Mercedes limousine saying he was "having a fun trip." Kim, however, looked frail as he limped to a chair in a meeting hall — a possible consequence of a stroke he reportedly had in 2008.

___

Klug reported from Seoul. Hyung-jin Kim and Sam Kim in Seoul and Jim Heintz in Moscow contributed to this report.

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