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US Economic News

Bernanke: Economy Healing, But Fed Support Still Needed

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2/2/2012 10:09 AM ET
(RTTNews) - The U.S. economy is on the mend, but not yet ready to stand on its own two feet without help from the Federal Reserve, the nation's top central banker told members of Congress on Thursday.

The sluggish expansion has left the economy vulnerable to shocks, according to Fed Chairman Ben Bernanke's prepared testimony before the House Budget Committee

Therefore, the Fed has decided to hold the benchmark interest rate near zero until at least late 2014.

"Over the past two and a half years, the U.S. economy has been gradually recovering from the recent deep recession," Bernanke said.

"While conditions have certainly improved over this period, the pace of the recovery has been frustratingly slow, particularly from the perspective of the millions of workers who remain unemployed or underemployed."

Bernanke cited a number of headwinds to a more sustained recovery, including the lingering European sovereign debt crisis and elevated commodity prices. However, he sounded a hopeful note by acknowledging recent improvements in consumer spending and job market activity.

His remarks were delivered ahead of Friday's pivotal monthly jobs report from the Labor Department.

Economists expect employment to increase by about 150,000 jobs in January, while the unemployment rate is expected to remain unchanged at 8.5 percent. Employment increased by 200,000 jobs in December, pushing the unemployment rate down to a nearly three-year low.

Nevertheless, "we still have a long way to go before the labor market can be said to be operating normally," Bernanke cautioned.

More specifically, Bernanke pointed to data showing more than 40 percent of the unemployed have been jobless for more than six months, roughly double the fraction during the economic expansion of the previous decade.

The housing market remains weak due to uncertain job prospects and tight tight mortgage credit conditions. These conditions, along with an excess supply of existing homes, have kept prices low.

Bernanke detected signs of life in the business sector, calling it a "relative bright spot in the current recovery." Capital spending has increased, with U.S. firms, notably in manufacturing but also in services, looking to capitalize on strong demand from foreign markets.

Turning to inflation, Bernanke said that stable commodity prices and substantial slack in labor and product markets will keep consumer prices in check this year.

He urged Congress to make long-term plans to get the nation's fiscal house in order, but warned that drastic spending cuts must be avoided until the economy is on more solid ground.

by RTT Staff Writer

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