US Stocks Surrender Early Gains As Bernanke Offers Gloomy Economic Outlook Without Clear Promise Of QE3

U.S. stocks gave back early gains and turned negative Tuesday after Federal Reserve Chairman Ben Bernanke set out a downbeat view of the economy to Congress without promising imminent easing measures.

The Dow Jones Industrial Average fell 66.75 points, or 0.52 percent, to 12,660.46, as Bernanke gave few clues that the central bank would take new steps to support the U.S. economy.

The S&P 500 dropped 4.87 points, or 0.36 percent, to 1,348.77 and the tech-heavy Nasdaq Composite Index slid 19.86 points, or 0.69 percent, to 2,877.08.

The ICE dollar index rose 0.48 percent to 83.54, while the euro fell 52 percent to $1.22.

Gold added to loss, off 1.3 percent to $1,572.20 an ounce and crude oil was down one percent at $87.51 a barrel.

Bernanke acknowledged in his congressional testimony Tuesday that the incoming economic data had been generally disappointing, but offered no hint that the Federal Open Market Committee was close to launching a third round of large-scale asset purchases.

Aside from repeating the standard line that the FOMC is prepared to take further action as appropriate, Bernanke avoided detailing what that action might consist of and stuck to the view that economic growth will likely continue at a moderate pace over coming quarters and then pick up very gradually.

Bernanke said that recent data points to annualized growth of less than 2 percent in the second quarter of 2012. Households remain concerned about their employment and income prospects and their overall level of confidence remains relatively low, he said.

We are looking carefully at the economy, trying to judge whether loss of momentum is enduring, Bernanke said.

When asked about the Fed's tools to support the economy, Bernanke made it clear that the Fed has looked at a range of possible tools, mostly involving balance sheet and communication. We haven't come to a specific choice at this point, but we are looking at ways to address if needed, Bernanke added.

Asset purchases do work, thought they are subject to diminishing returns, the Fed Chairman said.

My own assessment is that QE and operation twist have been effective. It was most evident in QE1. QE2 was certainly effective in addressing what was getting to be a worrisome risk of inflation. My view and the view of the Fed is that [QE2] also contributed to growth, Bernanke told lawmakers.

However, Bernanke hinted that Operation Twist and communication tools, notably forward guidance on how long rates will be kept at ultra-low levels, are the two main instruments at the Fed's disposal. Not a third round of asset purchases, or QE 3.