WASHINGTON — Federal Reserve Chairman Ben Bernanke offered a mostly upbeat assessment of the economy yesterday, citing improvements in inflation and housing in comments suggesting the Fed will leave interest rates alone for a while.

Wall Street liked the message and propelled stocks sharply higher.

Mr. Bernanke said that at present, interest rates are at a level that is “likely to foster sustainable economic growth and a gradual ebbing of core inflation.”

“Overall, the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes,” he said as he delivered the Fed’s economic report for the first time to a Democrat-controlled Congress.

The Fed has held a key interest rate steady at 5.25% since August, giving borrowers a reprieve.

Before that, the central bank steadily had raised rates for two years, the longest ever stretch of increases, to fend off inflation.

Many economists said Mr. Bernanke’s testimony to the Senate Banking, Housing and Urban Affairs Committee buttressed their belief that the Fed will continue to hold rates steady for much of this year.

Still, Mr. Bernanke was not prepared to declare victory over inflation just yet. Thus, he did not close the door on the possibility of further rate increases down the road.

The Fed chief was careful to hedge his bets and pointed out risks that could upset the generally good economic outlook.

One is that inflation might flare, which is why the Fed is keeping open the option of a rate increase.

It will “be some time before we can be confident that underlying inflation is moderating as anticipated,” Mr. Bernanke said. If inflation does not wane as the Fed expects, policymakers are “prepared to take action,” he said.

On the other hand, there is the risk that a deeper than expected residential real-estate bust could yet unfold, which could hurt overall economic growth, Mr. Bernanke said.

A former college professor, Mr. Bernanke marked his one-year anniversary at the Fed on February 1. President Bush tapped him to succeed Alan Greenspan, who rose to iconic status in his 18-plus years as chairman.

The committee chairman, Senator Dodd — who is a Democrat of Connecticut and 2008 presidential hopeful — as well as some of his colleagues said they thought Mr. Bernanke was doing a good job in managing the world’s largest economy.

Even so, Democrats were vocal about their concerns about the middle class.

“So while some in this country might believe that our economy is chugging along quite well …. there seems to be an increasing gap between the average citizen and those at the top of our economic ladder,” said Senator Menendez, a Democrat of New Jersey. “And the disparity that continues to grow in my mind is widening at an alarming rate.”

Democrats, who are in control of Congress for the first time in 12 years, accuse Mr. Bush of not doing enough to narrow economic inequality. Finding ways to close that gap between low- and high-income workers is a Democratic priority.

Mr. Bernanke said bolstering education and helping workers acquire new skills should help the situation.

On trade, Mr. Bernanke said he is not happy with America’s record-high deficits but suggested erecting protectionist barriers would do more harm than good.

China, he said, needs to do more to move to a flexible currency policy. Critics contend that Beijing is keeping its currency artificially low, hurting American exports and contributing to the loss of American factory jobs.

When asked about Japan, a huge competitive force for the troubled American auto sector, Mr. Bernanke said the Fed has seen no evidence that Japan is manipulating the yen to keep its value low.

Mr. Bernanke refused to weigh in on tax policy, much to the dismay of Senator Schumer, a Democrat of New York. “I think you are ducking it, in all due respect,” Mr. Schumer said.

When Mr. Bernanke took over last year, there was debate about whether the central bank could get the economy to slow sufficiently to thwart inflation, but not so much as to fall into recession.” You inherited an economy that was approaching a tipping point, and so far you have managed not to push it over,” said Senator Bunning, a Republican of Kentucky. Mr. Bunning was the only senator who had voted against Mr. Bernanke’s nomination as Fed chief.

In its latest economic projections, the Fed said it expects the economy this year to grow between 2.5% and 3% — as measured from the fourth quarter of last year to the fourth quarter of this year. That would be slower than a previous Fed forecast and less than the 3.4% growth logged for all of 2006.

“Core” inflation, meanwhile, should ease to between 2% and 2.2%, which would be down from 2.3% last year. Core inflation excludes the more volatile categories of energy and food.

The unemployment rate may creep up a bit this year and rise as high as 4.75%, which would still be low by historical standards.