Chairman Ben Bernanke said Wednesday that the Federal Reserve is open to another round of bond purchases to lower long-term interest rates and boost growth if the job market doesn't improve.
"If we don't see further improvement in the labor market, we will be prepared to take additional steps if appropriate," Bernanke said at a news conference after the Fed's two-day policy meeting.
The Fed on Wednesday agreed to extend a program to swap short-term bonds for longer-term bonds. That doesn't expand the Fed's portfolio, but still puts downward pressure on long-term rates.
But Bernanke said the Fed would consider expanding its portfolio with a third major round of bond purchases, if the outlook for hiring pick up.
The Fed has completed two such programs, known as quantitative easing, since the start of the Great Recession. It bought more than $2 trillion in Treasury bonds and mortgage-backed securities, expanding its portfolio to more than $2.8 trillion.
"Additional asset purchases would be among the things that we would certainly consider if we need to take additional measures to strengthen the economy," Bernanke said.
But investors seemed disappointed that the Fed didn't take such action after its meeting. Stocks had been mostly flat before the news conference started. They fell sharply after Bernanke started answering questions.
The Dow Jones industrial average fell more than 80 points in the final hour of trading, and broader indexes also declined.
Bernanke rejected a suggestion that the Fed has limited options left to boost growth.
"I still think that monetary policy has the capacity to strengthen the economy by easing financial conditions," Bernanke said.
But Bernanke said that Fed actions were "not a panacea" for an ailing economy, a point he's previously made. The Fed would welcome action by Congress and the administration, he said.
Bernanke was asked about criticism from GOP presidential candidate Mitt Romney, who has said that the Fed's last round of bond purchases had little success.
Bernanke disagreed. He said the purchases boosted growth and removed the threat of deflation, a period of falling prices that the United States last experienced during the Great Depression of the 1930s.
Bernanke also said Europe's debt crisis has affected the U.S. economy. But he said U.S. policymakers were taking steps to make sure financial institutions could withstand any shocks from the region. He specifically mentioned recent stress tests conducted on America's largest banks.
"It is important to be prepared for any further problems that might emerge from Europe," Bernanke said.