Federal Reserve Chairman Ben Bernanke told the U.S. House Budget Committee on Wednesday, June 9, that the nation’s economy continues to grow at a moderate pace and that while European debt problems have roiled financial markets, they should have only a modest impact on growth.

“The recovery in economic activity that began in the second half of last year has continued at a moderate pace so far this year,” Bernanke said in his statement. “Moreover, the economy–supported by stimulative monetary policy and the concerted efforts of policymakers to stabilize the financial system–appears to be on track to continue to expand through this year and next.”

Turning to developments in Europe, Bernanke noted that market concerns have mounted over the ability of Greece and other countries to manage their sizable budget deficits and high levels of public debt. As a result, he said, investors’ worries about problems such as exposure of major European financial institutions to vulnerable countries have torn through the markets here.

“U.S. financial markets have been roiled in recent weeks by these developments, which have triggered a reduction in demand for risky assets: Broad equity market indexes have declined, and implied volatility has risen considerably,” Bernanke said. “Treasury yields have fallen as much as 50 basis points since late April, primarily as a result of safe-haven flows that boosted the demand for Treasury securities. Corporate spreads have widened over the same period, and some issuance of corporate bonds has been postponed, especially by speculative-grade issuers.”

However, European leaders’ action to resolve their debt woes are having a stabilizing effect on markets, he said, and global investors have viewed U.S. Treasury securities as a safe haven. But Bernanke warned that failure to achieve fiscal sustainability will sap the nation’s economic vitality, reduce its living standards, and greatly increase the risk of economic and financial instability.

“Our nation’s fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession,” he said. “The exceptional increase in the deficit has in large part reflected the effects of the weak economy on tax revenues and spending, along with the necessary policy actions taken to ease the recession and steady financial markets. As the economy and financial markets continue to recover, and as the actions taken to provide economic stimulus and promote financial stability are phased out, the budget deficit should narrow over the next few years.”

Bernanke also spoke on June 7 at a dinner hosted by the Woodrow Wilson International Center for Scholars, a nonpartisan research group, where he visited the same theme of a tepid recovery. “There seems to be a good bit of momentum in consumer spending and investment,” he said. “My best guess is we will have a continued recovery, but it won’t feel terrific.”

Read a story about Bernanke’s thoughts on deficit control from the archives of InvestmentAdvisor.com.