Bernanke predicts muted economic improvement

Despite recent improvements in the economy, Federal Reserve Chairman Ben S. Bernanke on Tuesday expressed concerns about rising unemployment and foreclosures in the coming months, and reiterated that the central bank would keep interest rates at “exceptionally low levels for an extended period.”

In his semiannual report to Congress, Bernanke projected that the U.S. economy would turn the corner in the second half of this year, with growth gradually recovering next year and accelerating in 2011. But he said consumer spending, which accounts for about 70 percent of U.S. gross domestic product, was likely to be constrained by the weak labor market, tight credit and declining home prices.

“We have a very long haul here,” Bernanke said, addressing a question from the House Committee on Financial Services.

“Unemployment is going to stay up for quite awhile, and it’s not going to feel like a strong economy,” he said, raising the specter of a jobless recovery.

Bernanke said that the jobless rate, which hit 9.5 percent in June, probably would peak at the end of this year and that overall employment would start growing again at year’s end or early next year. The U.S. economy shed nearly half a million jobs in June, putting the total payroll losses since the recession began in December 2007 at about 6.5 million.

In his prepared remarks, Bernanke indicated that, given the economic conditions and low inflation, the key federal funds rate was likely to remain near zero for an extended period. That is the rate that banks charge one another for overnight loans.

At the same time, he sought to reassure Wall Street and the public that the Fed had the ability to withdraw in “a smooth and timely manner” the extraordinary policy measures that it took to boost the economy, so as to avert a buildup of inflation in the future.

“We are confident that we have the necessary tools to implement that strategy when appropriate,” he said, noting that some of the emergency measures already have started to unwind. The total credit extended by the Fed to banks and other entities, he said, had fallen below $600 billion from about $1.5 trillion at the end of 2008.

In response to a question about President Barack Obama’s $787 billion stimulus package, Bernanke told lawmakers that he believed the money had helped to support consumer spending and the labor market. But he said it was too early to assess the overall effectiveness of the package.

(c) 2009, Tribune Co. Source: McClatchy-Tribune Information Services.