U.S. Federal Reserve Chairman Ben Bernanke told Congress on Wednesday a weak job market and tame inflation warrant low interest rates for an extended period, curbing speculation the central bank was moving closer to raising borrowing costs.

In his first appearance before Congress following a testy confirmation vote in the Senate last month, Bernanke offered a relatively somber assessment of the U.S. economy despite recent signs of strong growth.

The country has lost 8.4 million jobs in just over two years in the most severe economic downturn since the Great Depression. The Fed chief said job losses were abating, but acknowledged the recession's toll on American workers.

Notwithstanding the positive signs, the job market remains quite weak, Bernanke told the U.S. House of Representatives Financial Services Committee.

Delivering the Fed's semiannual report to Congress, Bernanke said the U.S. central bank's policy-setting Federal Open Market Committee was prepared to support the economy with extraordinary stimulus for some time.

U.S. stocks rose nearly 1 percent on the day, with bank shares benefitting from Bernanke's low-rate vow. The dollar fell as investors backed away from the notion rate hikes were forthcoming. Interest rate futures rose, reducing the implied chances of tightening before year-end.

The FOMC continues to anticipate that economic conditions -- including low rates of resource utilization, subdued inflation trends, and stable inflation expectations -- are likely to warrant exceptionally low levels of the federal funds rate for an extended period, he said, echoing the Fed's most recent policy statement in late January.

The Fed last week surprised markets by raising the discount rate it charges on direct emergency loans to banks. The move spurred fears the central bank was about to embark on a broader push for higher borrowing costs, even though the Fed made no change to the federal funds rate, its main policy tool.

But the central bank has said the discount rate hike was simply an effort to pull back on the measures it had taken to increase liquidity in financial markets. Bernanke repeated that message, saying the step was taken to discourage banks from relying on the discount window rather than private funding markets for short-term credit.

HOUSING PREDICAMENT

Fed officials have held the benchmark overnight interbank rate in a zero to 0.25 percent range since December 2008 and suggested they would likely wait several months after removing the extended period phrase from their policy statement before proceeding to raise it.

They have also committed to buy more than $1.4 trillion in mortgage-linked debt to keep mortgage rates low.

A report on new home sales on Wednesday highlighted the Fed's predicament. Sales slumped more than 11 percent to a record low, suggesting the sector at the epicenter of the financial crisis had yet to fully heal.

We may be in for a rough ride in housing, said Adam York, economist at Wells Fargo in Charlotte, North Carolina.

Commercial real estate, where defaults are supposed to spike this year, also remains a key concern. Bernanke called it the biggest credit issue we still have.

Bernanke said, however, the time would come for tighter policy and argued the Fed possesses a broad array of tools to remove such accommodation when the moment is right.

Among the Fed's options, he said, are transactions that would drain excess money from the financial system. One such program, a term deposit facility that would give banks the incentive to park their money at the central bank, could be operational shortly after being tested this spring, the Fed said in its semiannual report.

Most analysts do not expect the Fed to raise the federal funds rate until sometime in the second half of the year, at the earliest. Similarly, a Reuters poll released on Wednesday showed economists expect the European Central Bank to keep euro zone interest rates on hold until the fourth quarter.

DEFICIT POLITICS

Legislators on both sides of the aisle used the hearing to play out the ongoing tug-of-war in Congress over budget deficits. Committee Chairman Barney Frank leaned on Bernanke to argue that the fiscal stimulus measures enacted by Democrats have helped alleviate some of the nation's employment losses.

Republicans, for their part, wanted Bernanke's view on the long-term implications of the government's funding gap, which he said was not on a sustainable path.

A U.S. credit rating downgrade is not likely, Bernanke said, though he warned that bond market worries on growing U.S. debt could send interest rates higher. If unattended, the budget woes even poses the risk, however small, of a sharp drop in the U.S. dollar.

I think it would be helpful for the current situation if the Congress and the administration ... could provide a plan which shows how the deficit will fall, Bernanke said.

(Additional reporting by Emily Kaiser; Editing by Andrew Hay)

Ben Bernanke