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 a Kansas City Federal Reserve Bank symposium in Jackson Hole, Wyoming.

The dollar trimmed gains against the euro as investors bet that Bernanke's remarks were evidence of little inclination at the U.S. central bank to raise rates while markets remained strained and growth 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.

Interest rate futures currently imply a 14 percent chance the Fed will raise interest rates by a quarter point at its next scheduled policy meeting, on September 16, with a 38 percent likelihood of a hike by year-end. This was up from odds of 32 percent before.

The Fed chairman said the U.S. central bank's current low interest-rate strategy was conditioned on oil and commodity prices stabilizing as the global economy slows and that trend appeared to be happening.