Bernanke: oil prices could lead to weaker growth, higher inflation

Offering no hint that he was considering cutting short the Fed's $600 billion stimulus, Bernanke told the Senate Banking Committee he saw increasing evidence that the US economic recovery was becoming self-supporting. At the same time, he warned job growth remains far too anemic.

"We do see some grounds for optimism about the job market over the next few quarters," Bernanke said, citing among other factors a steep recent decline in the jobless rate.

The economy expanded at just a 2.8 percent annual pace in the fourth quarter and the jobless rate stood at an elevated 9 percent in January. While hiring appears to be picking up, the pace is too slow to make much of a dent in unemployment.

"Until we see a sustained period of job creation, we cannot consider the recovery to be truly established," Bernanke said in remarks prepared for delivery to the panel.

Bernanke said downside risks to growth had diminished, and said for the first time that the risk of deflation - a key justification for the Fed's bond-buying spree - was now "negligible."

At the same time, Bernanke did not appear concerned that a recent spike in the price of crude oil, driven in part by a wave of pro-democracy revolutions in the Middle East and North Africa, would do much harm to the U.S. economic outlook.

Crude oil prices briefly surpassed $100 a barrel in late February but have since come down to around $98.

Bernanke said the Fed expects inflation to remain low and that long-term inflation expectations appear contained, both according to market indicators and surveys of consumers.

"The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in US consumer price inflation," Bernanke said.

However, he warned that if expectations of future inflation were to build, the Fed may need to act.

"We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability," he said.