(Agencies)
Updated: 2008-01-11 09:28

US stock markets initially surged after Bernanke's comments, then retreated before closing higher on a report that Bank of America was in talks to buy mortgage lender Countrywide Financial Corp..

The Dow Jones Industrial Average added 117.78 points to end at 12,853.09, while the Nasdaq Composite Index closed up 13.97 at 2,488.52.

Bond prices closed mostly lower as investors shifted money to stocks, giving up earlier gains that were fueled by hopes the Fed would lower benchmark overnight rates by a hefty half-percentage point to 3.75 percent at its next scheduled policy meeting on January 29-3O.

Interest-rate futures contracts shifted to price in a near certainty of a half-point cut. The Fed already has cut rates a full percentage point since mid-September.

Focus on growth

Bernanke suggested policy-makers now were more worried about sustaining growth than they were fearful of inflation. He said inflation expectations were "reasonably well anchored" and pledged to monitor those expectations closely.

"Incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced," he said. He cited "considerable evidence that banks have become more restrictive in their lending" to consumers and businesses.

But he told a questioner the economy would likely dodge recession. "The Fed is not currently forecasting recession ... we are forecasting slow growth," Bernanke said.

But Kansas City Fed President Thomas Hoenig sounded a different note in a speech in Kansas City on Thursday, saying he is "less pessimistic than some" and still wary of rising prices.

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