Expectations that the economy grew at 3 per cent in the July-September quarter has emboldened some economists to declare that the market turmoil may turn out to be only a speed bump for the economy. Others seem convinced that a serious downturn lies ahead. Things will become clearer only when the Commerce Department releases its initial estimate of third quarter growth on 31 October.

The Fed chief said the economy did appear to have gained some momentum in the third quarter, but did not reveal his hand on the key issue of the longer-term outlook, except to say: "Thus far... direct evidence of spillovers onto the broader economy has been limited."

He said that the Fed would be watching consumer and business spending carefully to see whether the weakness in home prices affects consumer spending and whether businesses have become more cautious in hiring. "The labour market has shown some signs of cooling, but it is quite tentative so far, and real income is still growing at a solid pace," Bernanke said.

Saying that the inflation outlook was benign despite higher prices of crude oil and other commodities in recent weeks and the decline in the foreign exchange value of the dollar, Bernanke said that the slower growth in coming quarters would help dampen inflation pressures. He said history suggests that price gains from a weaker dollar are small.

Bernanke said the Fed judged that the risks to inflation from the surprise half a percentage point rate cut last month were "acceptable". It was prepared to reverse the policy easing if inflation pressures proved somewhat stronger than expected. He said risk management played a role in the decision on the half-point rate cut.

"By doing more sooner, we might be able to forestall some part of the adverse effects of the disruptions in financial markets," he said, pointing out that the rate cuts, combined with the technical steps the Fed has taken to restore liquidity, has reduced some of the pressure on financial markets.

"The improved functioning of financial markets is a positive development, in that it increases the likelihood of achieving moderate growth with price stability," Bernanke said. But the financial markets are not out of the woods, he stressed. "Considerable strains remain," Bernanke said, pointing out that lessons learent from the financial market turmoil will lead to a healthier financial system over the longer term. He said Washington regulators would comprehensively review events to better understand the episode.

The Fed counters criticism saying it did too little too late, by pointing out that it is very difficult for the central bank to identify asset bubbles early enough to keep them from developing. They say that attacking perceived asset bubbles would have untoward economic consequences.

Asked about the weak dollar, Bernanke replied that the Fed''s mandate was to preserve the domestic purchasing power of the dollar. But, he added, no central banker can be indifferent to the exchange value of its currency, and the Fed would pay attention to the issue.