2010-02-24 16:12:08.374 GMT

(Adds comment from Bernanke in 21st paragraph.)

By Craig Torres
Feb. 24 (Bloomberg) — Federal Reserve Chairman Ben S.
Bernanke said the U.S. economy is in a “nascent” recovery that
still requires low interest rates to encourage demand by
consumers and businesses once federal stimulus expires.
“A sustained recovery will depend on continued growth in
private-sector final demand for goods and services,” Bernanke
told the House Financial Services Committee today in Washington
at the start of his two days of semi-annual testimony before
Congress. “Private final demand does seem to be growing at a
moderate pace.”
The 56-year-old Fed chairman, who began his second four-
year term this month, said slack labor markets and low inflation
will allow the Federal Open Market Committee to keep the
benchmark lending rate, which has been in a range of zero to
0.25 percent for more than a year, low “for an extended
period.” He said the Fed will need to start tightening policy
“at some point.”
“The FOMC continues to anticipate that economic conditions
— including low rates of resource utilization, subdued
inflation trends, and stable inflation expectations — are
likely to warrant exceptionally low levels of the federal funds
rate for an extended period,” he said.
The Standard & Poor’s 500 Index rose 1 percent to 1,105.05
at 10:50 a.m. in New York. The yield on the benchmark 10-year
note fell two basis points, or 0.02 percentage point, to 3.66
percent in New York, according to BGCantor Market Data.

Decision Last Week

Bernanke’s testimony follows the Federal Reserve Board’s
decision last week to raise the cost of direct loans to banks by
a quarter-point to 0.75 percent. The Fed portrayed the move as a
“normalization” of bank lending and said it didn’t change the
outlook for the economy or monetary policy, a message the Fed
chairman reiterated today.
Bernanke cited “tentative” signs of stabilization in
labor markets such as fewer job losses, a rise in manufacturing
employment, and stronger demand for temporary help.
“Notwithstanding these positive signs, the job market
remains quite weak, with the unemployment rate near 10 percent
and job openings scarce,” Bernanke said. He said the 40 percent
of the unemployed who have been without work for six months or
more are a “particular concern.”
Policy makers are trying to ensure a durable expansion that
will start generating enough jobs to bring down an unemployment
rate they forecast to end the year at 9.7 percent, above their
estimate of full employment of around 5 percent. At the same
time, they want to convince investors that they can start
withdrawing $1.1 trillion in excess cash from the banking system
in time to keep inflation at bay.

Inflationary Pressures

“As the expansion matures, the Federal Reserve will at
some point need to begin to tighten monetary conditions to
prevent the development of inflationary pressures,” the Fed
chairman said. “Notwithstanding the substantial increase in the
size of its balance sheet associated with its purchases of
Treasury and agency securities, we are confident that we have
the tools we need to firm the stance of monetary policy at the
appropriate time,” he said.
Manufacturing is leading the rebound from the worst
recession since the 1930s as companies prevent inventories from
being further depleted and invest in new machinery and equipment
to take advantage of a rebound in global demand.
The economy grew at a 5.7 percent annual pace in the fourth
quarter of last year, the fastest in six years. Fed officials
last month forecast growth in 2010 of 2.8 percent to 3.5
percent, and minutes of their January meeting showed they are
seeking more evidence the recovery is sustainable.

Conditions Improved

Bernanke said that conditions in financial markets have
improved, making equity and debt financing available for larger
firms. “In contrast, bank lending continues to contract,
reflecting both tightened lending standards and weak demand for
credit amid uncertain economic prospects,” he said.
The Fed has expanded its balance sheet to $2.28 trillion in
an attempt to supplement credit to the economy. U.S. central
bankers are finishing up a $1.43 trillion program of mortgage-
backed securities and housing agency debt purchases next month.
“The FOMC will continue to evaluate its purchases of
securities in light of the evolving economic outlook and
conditions in financial markets,” Bernanke said.
The actions by the central bank haven’t stimulated private
bank credit. Total loans and leases by banks in the U.S. have
fallen 7 percent for the 12 months ending January. Consumer
loans have fallen 6.5 percent over the same period.

‘Sustained Job Growth’

“They want to see sustained job growth and credit growth
to small businesses,” Michael Darda, chief economist at MKM
Partners LP in Greenwich, Connecticut, said before the testimony
was released. “The Fed is going to keep rates low and the
balance sheet big until you see those two things start
recovering.”
The Fed’s actions to combat the financial crisis have led
to scrutiny of the central bank in Congress, which is drafting
the biggest overhaul of financial regulation since the 1930s.
The House voted Dec. 11 to approve a proposal by
Representative Ron Paul, a Republican from Texas, to end a ban
on audits of monetary policy. House legislation would also strip
the Fed of consumer-protection powers and give the authority to
a new agency. A Senate discussion draft proposed stripping the
Fed of all bank supervisory powers.

Emergency Powers

Bernanke said the use of emergency powers to support
businesses and firms other than banks created a “special
obligation” to the Congress and the public. He invited the
Government Accountability Office to inspect the Fed’s
facilities.
“We are also prepared to support legislation that would
require the release of the identities of the firms that
participated in each special facility after an appropriate
delay,” he said.
Monetary policy, he said, must be shielded from political
pressures to protect independence.
“It is vital that the conduct of monetary policy continue
to be insulated from short-term political pressures so that the
FOMC can make policy decisions in the longer-term economic
interests of the American people,” he said.
Industrial production in the U.S. rose more than
anticipated in January as factories churned out more consumer
goods and equipment. The 0.9 percent increase followed a 0.7
percent gain the prior month, according to Fed data.

Analysts’ Estimates

Deere & Co., the world’s largest maker of farm machinery,
posted first-quarter profits Feb. 17 that topped analysts’
estimates and raised its 2010 forecast as projections improved
for agricultural-equipment sales in the U.S. and Canada.
Job losses are damping the confidence of consumers whose
spending accounts for 70 percent of the world’s largest economy.
The Standard & Poor’s 500 Stock Index has fallen 1.8 percent
this year, after rising 23 percent in 2009.
Consumption rose at a 2 percent annual pace in the final
three months of 2009, below the 2.8 percent pace the previous
quarter. The New York-based Conference Board said yesterday that
its consumer confidence index fell this month to the lowest
level since April 2009.
Wal-Mart Stores Inc., the world’s largest retailer,
reported fourth-quarter sales on Feb. 18 that trailed its
projection after cutting grocery and electronics prices, and
predicted a “challenging” first quarter for U.S. stores.

For Related News and Information:
Federal Reserve links: FED
Credit crunch page: WWCC
Fed balance-sheet figures: ALLX FARW
Government relief programs: GGRP
Fed monetary policy: FOMC
Fed Web links: FRBM
Central bank rates worldwide: CBRT

–With assistance from Keith Naughton in Southfield, Michigan.
Editors: Christopher Wellisz, James Tyson

To contact the reporters on this story:
Craig Torres in Washington at +1-202-654-1220 or
ctorres3@bloomberg.net;

To contact the editor responsible for this story:
Christopher Wellisz at +1-202-624-1862 or cwellisz@bloomberg.net

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