NEW YORK (CNNMoney.com) - Federal Reserve Chairman Ben Bernanke told lawmakers Wednesday that the economy was in good shape and suggested the central bank was likely to raise interest rates further in a bid to keep inflation under control.

In his first appearance before a Congressional panel as head of the central bank, Bernanke said in prepared remarks that while the economy had snapped back from a fourth-quarter slowdown, it could be in danger of overheating and causing an unacceptable increase in prices.

Ben Bernanke in his first appearance as Fed chairman on Capitol Hill.

"Gauging the economy's sustainable potential is difficult, and the Federal Reserve will keep a close eye on all the relevant evidence and be flexible in making those judgments," he told the House Financial Services committee in his prepared remarks.

"Nevertheless, the risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately -- in the absence of countervailing monetary policy action -- to further upward pressure on inflation."

The term "monetary policy action" is the way the Fed normally refers to raising or lowering short-term interest rates.

Referring to the last meeting of Federal Open Market Committee under his predecessor, Alan Greenspan, which raised interest rates by a quarter percentage point for the 14th straight time, Bernanke added, "The FOMC judged that some further firming of monetary policy may be necessary, an assessment with which I concur."

The FOMC is the Fed's policy-making arm.

Fed watchers and investors seemed to get what they were expecting from the new Fed chairman.

"Bernanke didn't really say anything people weren't expecting," said Drew Matus, senior economist at Lehman Brothers. "He basically said the economy is doing well."

The markets rallied briefly as his prepared remarks were released, then gave up their gains, only to turn higher in afternoon trading as oil prices fell for a fourth straight session.

Former Fed governor Lyle Gramley of the Stanford Washington Research Group said his expectations, and those of other economists, for future Fed rate action wasn't changed at all by Bernanke's comments.

"He went to some length to emphasize the importance of price stability because some in the financial markets had tried to characterize him as a dove on inflation," said Gramley. "I think the objective was to not rock the boat. He didn't go an ounce beyond what the Fed has already told us."

Gramley said another quarter-point rate hike at the March 27-28 two-day Fed meeting, the first under Bernanke's direction, is a virtual certainty. As for the following meeting May 10, "I think the chance (of another hike) is about 50-50, maybe a little better than that," said Gramley.

Bernanke said that, despite his inflation concerns, the Fed forecast that so-called "core" inflation measures, excluding volatile food and energy prices, should be up about 2 percent this year and 1.75 percent to 2 percent next year.

Bernanke also cited Fed forecasts for the unemployment rate to stay between 4.75 and 5 percent, close to its most recent reading, and for the gross domestic product, the broadest measure of the nation's economic activity, to be up 3.5 percent this year and 3 to 3.5 percent in 2007.

"While considerable uncertainty surrounds any economic forecast extending nearly two years, I am comfortable with these projections," he said.

Bernanke cited other risks to the economy, including a softening housing market and the risk of higher energy prices both cutting into consumer spending. And he promised that the Fed will be on watch for signs of an economic slowdown as it sets interest rates at future meetings.

"In coming quarters, the FOMC will have to make ongoing, provisional judgments about the risks to both inflation and growth, and monetary policy actions will be increasingly dependent on incoming data," he said in his prepared remarks.

Still he does not think there will be any sharp drop in housing value, with mortgage rates relatively low despite recent increases. He said strong employment levels should continue to support housing markets, adding that a "leveling out or a modest softening of housing activity seems more likely than a sharp contraction." In response to a question, he said he expected housing prices to still show gains, albeit at a lower rate than in recent years.

He also said in response to a question by committee chairman Michael Oxley, R-Ohio, that the so-called inverted yield curve isn't the sign of a recession or economic slowdown, as it has often indicated in the past.

An inverted curve occurs when longer-term rates are lower than those for short-term debt. Bernanke said rates at both ends of the curve are low by historic standards, and should not be a drag on economic growth.

Asked about what can be done to lower energy prices, Bernanke said there isn't much. He said global energy demands are close to maximum available supplies, and that further energy price spikes are likely due to future supply disruptions.

But he said that current energy prices are encouraging the development of new sources of energy as well as conservation that could contain prices in the long-term.

"Longer term, I'm actually fairly optimistic about 10, 15 or 20 years down the road," he said. "But in the next 5 to 10 years we're in a zone of vulnerability with a relatively low margin of error in terms of energy supply."

Asked about the risks posed to the economy by the federal budget deficit and what role he should play in the debate, Bernanke said he is concerned. But he laid out the choices that will await in broad terms -- including curtailing benefits to retirees, raising taxes or slashing other government spending -- without making any indication of which was the most desirable alternative.

"I think that in my role as chairman of the Federal Reserve, it is appropriate to talk about long-term government spending, deficits and taxes," he said, adding later in his answer, "We need to be addressing those long-term solutions soon."

Bernanke refused to express an opinion when asked about raising the minimum wage.

"I'm going to be an economist and give you a 'On the one hand on the other hand' answer," he said. "I'm very reluctant to comment on specific measures of this sort."

Those answers were far more circumspect than those of his predecessor. In recent years, Greenspan had been willing to comment on a wide variety of policy questions sometimes far afield from the Fed's monetary policy. For example Greenspan had come out against an increase in the minimum wage in earlier testimony.

For the most part, Bernanke's language was somewhat less dense and impenetrable than Greenspan's comments.

"His statement was a model of clarity," said former Fed governor Gramley in reviewing the comments. "I think it was clear that Bernanke is going to answer a bit more forthrightly than Greenspan."

And while members from both parties took the opportunity to speak well of Greenspan during their comments, the difference in style was appreciated.

"We're going to miss Chairman Greenspan. No one talks like him -- and no one wants you to," Rep. Maxine Waters, D-Calif., told the new chairman.

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