The sluggish U.S. recovery is likely the result of temporary factors including high energy prices and supply disruptions caused by Japan's tsunami, the nation's top central banker told lawmakers Wednesday.
However, the Federal Reserve stands ready to offer further support measures if the economy remains in the doldrums, Chairman Ben Bernanke said in prepared remarks given to the House of Representatives Committee on Financial Services.
With gas prices easing and the auto sector getting back on line, household spending should pick up in time to support the economy in the second half of the year, according to Bernanke.
"The anticipated pickups in economic activity and job creation, together with the expected easing of price pressures, should bolster real household income, confidence, and spending in the medium run," he said.
Bernanke is facing lawmakers on Capitol Hill, just days after a dreadful U.S. employment report confirmed suspicions that the economy is not generating enough jobs.
The housing market also remains "depressed," according to Bernanke, and fiscal tightening at all levels of government represents a headwind to growth.
Still, the Fed projects that the economy will grow 2.7 to 2.9 percent for 2011, inclusive of the weak first half, and 3.3 to 3.7 percent in 2012. From there, real GDP should pick up to 3.5 to 4.2 percent in 2013, Bernanke said.
The jobless rate, which rose to 9.2 percent in June, should gradually drop to at least 7.5 percent by the end of 2013.
But if the economic recovery does not proceed as expected, the Fed is prepared to take action in addition to keeping its benchmark interest rate near zero.
"The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support," he said.
On the other hand, the Fed stands ready to guard against inflation by raising benchmark interest rates.
"Changing the level or range of the federal funds rate target would be our primary means of adjusting the stance of monetary policy in response to economic developments," said Bernanke.
Bernanke said the recent rise in inflation appears "transitory,' and policy makers inflation to subside in coming quarters to rates at or below the Fed's informal 2 percent target.
The Fed sees 2.3 to 2.5 percent annual inflation for 2011 as a whole, which implies a significant slowing of inflation in the second half of the year.
In 2012 and 2013, inflation forecasts dip as low as 1.5 percent, giving the Fed plenty of room to keep interest rates at historically accomodative levels.
The target range for the federal funds rate remains at effectively zero and the Fed expects that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for "an extended period."
Bernanke rebuffed critics of the Fed's controversial quantitative easing program, saying the $600 billion bond purchase plan lowered borrowing costs and created easier financial conditions throughout the economy.
The Fed stopped buying securities in June, but Bernanke said maintaining holdings of these securities should continue to put downward pressure on market interest rates and foster accommodative financial conditions.
In the opening minutes of the question and answer session, Bernanke urged lawmakers to put the U.S. on a more sustainable fiscal path.
He chided Congress for playing politics with the debt ceiling, saying that default would create "tremendous" problems. Defaulting would create "a major crisis...causing shock waves through the global financial system," Bernanke warned.
Although the nation should be put on a sustainable fiscal path with long-term deficit reduction, Bernanke said that drastic spending cuts should be put off until the economy is on more stable footing.
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