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Fed Chair: Economy Should Grow Later in 2009

BY Admin  May 5, 2009 at 11:00 AM EDT

Federal Reserve Chairman Ben Bernanke; file photo

But Bernanke warned that even after a recovery begins, economic activity is likely to be subpar, meaning that unemployment and job losses will move higher.

Still, Bernanke offered lawmakers a less dour economic assessment: “We continue to expect economic activity to bottom out, then to turn up later this year,” he said, according to testimony prepared for his appearance before Congress’ Joint Economic Committee to provide a fresh assessment of the country’s economic health.

Bernanke is likely to face tough questions about the Fed’s multitrillion-dollar efforts to bust through credit clogs and get banks lending more freely again to people and businesses.

Many economists believe Fed policies may lead to inflation, but Bernanke offered no hint of fear of rising prices.

“In this environment, we can anticipate that inflation will remain low,” he said, adding that the recovery will likely only gradually gain momentum.

Bernanke tempered optimism by saying the labor market will continue to be weak in coming months.

Economists say the Fed will be slow to remove support for the economy, according to MarketWatch. Key interest rates are expected to stay just above zero through the end of the year.

Some lawmakers are worried that the Fed’s lending programs, as well as the government’s bailout of insurance giant American International Group and taxpayer aid to Citigroup, Bank of America and others, will encourage companies to take excessive risks on hopes of a U.S. government bailout.

The panel’s chair, Rep. Carolyn Maloney, D-N.Y., and other lawmakers, have pushed the Fed to be less secretive. Some have called for the Fed to disclose the identity of banks and investment firms that draw loans from its emergency lending program and what collateral they put up for them.

Bernanke is likely to be prodded for details about how 19 large banks fared on “stress tests” — the results of which are to be released Thursday should shed light on which banks may need government support if the recession were to take a turn for the worse.

But there have been some glimmers of hope that the recession is letting up.

Economic reports released Monday show that construction spending and pending home sales both fared better than expected in March, and that gave stocks a big lift.

Although the economy is still contracting, “the pace of contraction appears to be somewhat slower,” Fed policymakers said last week in deciding not to take any new steps at that time to shore up the economy.

Even though spending by American consumers has shown signs of “stabilizing, ” the Fed said that ongoing job losses, tanking home values and hard-to-get credit will continue to weigh on consumers.