The Economy Is Healthy, but...

Federal Reserve Chairman Ben Bernanke said the U.S. economy appeared sound with inflation easing, as he expressed confidence the current level of interest rates would cut further into price pressures.

"Overall, the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes," Bernanke told the Senate Banking Committee as he delivered the central bank's semiannual monetary policy report.

While Bernanke said the Fed's current policy stance, with overnight interest rates at 5.25 percent, was likely gradually to bring nonfood, nonenergy inflation down further, he said the central bank was prepared to act to beat back inflation if necessary.

Financial markets took their cue from Bernanke's view that inflation pressures were ebbing, and prices for U.S. stocks and government bonds rose, while the value of the dollar fell as traders saw the testimony as suggesting the Fed might be in position to lower interest rates late in the year.

Robust economic activity among major U.S. trade partners is helping to spur a solid expansion in U.S. exports and should continue to do so, the Fed chairman added.

Bernanke, who wrapped up his first year as Fed chief on Feb. 1, came to the job as an advocate for setting explicit targets for acceptable inflation levels, but it is unclear how far the Fed might move in that direction.