Bernanke: Markets are 'working well'

NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke told members of Congress Wednesday that U.S. financial markets appear to be "working well" and are functioning normally, one day after the Dow posted its biggest one-day point loss since the market reopened after the Sept. 11 attacks.

Responding to a question from a member of the House Budget Committee, Bernanke said that the central bank was closely monitoring the stock market after the Dow slumped 416 points Tuesday amid a selloff in stocks worldwide.

Bernanke said the selloff did not change the Fed's view on U.S. economic growth. "There is really no material change in our expectations for the U.S. economy since I last reported to Congress a couple weeks ago," he said.

"If the housing sector begins to stabilize and if some of the inventory corrections that are still going on in manufacturing begin to be completed, there is a reasonable possibility of strengthening of the economy sometime during the middle of the year," he added.

On Wall Street, stocks rebounded from Tuesday's selloff after Bernanke's comments. (Full story).

"Some will say he passed with flying colors: he sounded reassuring," Tony Crescenzi, chief bond market strategist with Miller, Tabak & Co., told Reuters. "The Fed is still confident in this situation. It is his first real test after a financial event."

Bernanke did not address U.S. interest rate policy or the steep selloff in world markets Tuesday.

Lawmakers did not ask the Fed chief about comments made earlier this week by his predecessor Alan Greenspan who warned that the U.S. economy might fall into recession by the end of the year. (Full story)

Senior White House economic adviser Edward Lazear echoed Bernanke's comments Wednesday, calling the big decline in U.S. markets Tuesday an anomaly.

"It looks like whatever happened yesterday was anomalous," Lazear said. "We don't think of it reflecting any of the fundamentals in the economy, which I think are quite strong."

During a question and answer session with lawmakers, Bernanke touched a variety of issues, including the need for better savings education among America's youth and the Fed's concerns about the domestic subprime mortgage market, which services borrowers with weak credit histories.

The Fed chairman also urged lawmakers to consider the impact of more open U.S. trade, which can provide widespread economic growth, but also result in the loss of domestic jobs.

"We have to weigh those costs and benefits," he said.

In his prepared remarks, Bernanke renewed his warning to Congress that failure to take action soon by Congress to prepare for the retirement of aging Baby Boomers could lead to serious economic harm.

Bernanke's prepared speech were nearly identical to remarks he delivered to a Senate panel last month. "A vicious cycle may develop in which large [budget] deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits," he said in his prepared remarks.

He said that over time, the United States needed to move toward fiscal policies that were sustainable and that would promote more saving to support the Social Security retirement program without imposing undue costs on taxpayers. However, he offered no specific policy prescriptions.

--from staff and wire reports

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