Bernanke says U.S. inflation outlook "uncertain"

By Mark Felsenthal and Alister Bull

JACKSON HOLE, Wyoming (Reuters) - Federal Reserve Chairman Ben Bernanke on Friday said the stronger dollar and lower oil prices, along with the weak economy, should curb inflation, in a hint that interest rates would stay on hold, though he warned the inflation outlook is "highly uncertain."

Bernanke called a recent decline in commodity prices and stabilization of the U.S. dollar "encouraging."

"If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next," he told the annual Kansas City Federal Reserve Bank conference on monetary policy in Jackson Hole, Wyoming..

At the same time, a top European Central Bank official told the same gathering that monetary policy cannot solve the credit crisis alone and keeping inflation in check may be the best way to help strained financial markets.

"At times of extraordinary volatility and dramatic risk re-pricing, maintaining price stability could be the best contribution that monetary policy could give to the return to financial stability," ECB governing council member Mario Draghi said in a speech.

The dollar, which earlier this week hit a six-month high against the euro, surged on Friday as gloomy British growth data backed views of a slowing global economy and raised prospects of interest rate cuts outside the United States, Investors, meanwhile, bet that Bernanke's remarks were evidence of little inclination at the U.S. central bank to raise rates while markets remain strained and growth is challenged by the housing contraction.

U.S. Treasury debt prices fell as Bernanke's remarks reduced safe-haven bids for government bonds, while stocks jumped.

"There will be no change in monetary policy for the foreseeable future," said Kevin Flanagan, fixed income strategist, global wealth management, at Morgan Stanley in Purchase, New York. "The emphasis still is on the economic and market risks, but still trying to walk a fine line on inflation as well," he said.