WASHINGTON (MNI) – The following is the text of Federal Reserve
Chairman Ben Bernanke’s remarks prepared for the Joint Economic
Committee of Congress Wednesday:

Chair Maloney, Vice Chairman Schumer, Ranking Members Brownback and
Brady, and other members of the Committee, I am pleased to be here today
to discuss economic and financial developments. I will also make a few
remarks on the fiscal situation.

The Economic Outlook

Supported by stimulative monetary and fiscal policies and the
concerted efforts of policymakers to stabilize the financial system, a
recovery in economic activity appears to have begun in the second half
of last year. An important impetus to the expansion was firms’ success
in working down the excess inventories that had built up during the
contraction, which left companies more willing to expand production.
Indeed, the boost from the slower drawdown in inventories accounted for
the majority of the sharp rise in real gross domestic product (GDP) in
the fourth quarter of last year, during which real GDP increased at an
annual rate of 5.6 percent. With inventories now much better aligned
with final sales, however, and with the support from fiscal policy set
to diminish in the coming year, further economic expansion will depend
on continued growth in private final demand.

On balance, the incoming data suggest that growth in private final
demand will be sufficient to promote a moderate economic recovery in
coming quarters. Consumer spending continued to increase in the first
two months of this year and has now risen at an annual rate of about
2-1/2 percent in real terms since the middle of 2009. In particular,
after slowing in January and February, sales of new light motor vehicles
bounced back in March as manufacturers offered a new round of
incentives. Going forward, consumer spending should be aided by a
gradual pickup in jobs and earnings, the recovery in household wealth
from recent lows, and some improvement in credit availability.

In the business sector, capital spending on equipment and software
appears to have increased at a solid pace again in the first quarter.
U.S. manufacturing output, which is benefiting from stronger export
demand as well as the inventory adjustment I noted earlier, rose at an
annual rate of 8 percent during the eight months ending in February.
Also, as I will discuss further in a moment, financial conditions
continue to strengthen, thus reducing an important headwind for the
economy.

To be sure, significant restraints on the pace of the recovery
remain, including weakness in both residential and nonresidential
construction and the poor fiscal condition of many state and local
governments. Sales of new and existing homes dropped back in January and
February, and the pace of new single-family housing starts has changed
little since the middle of last year. Outlays for nonresidential
construction continue to contract amid rising vacancy rates, falling
property prices, and difficulties in obtaining financing. Pressures on
state and local budgets, though tempered by ongoing federal support,
have led to continuing declines in employment and construction spending
by state and local governments.

As you know, the labor market was particularly hard hit by the
recession. Recently, we have seen some encouraging signs that layoffs
are slowing and that employment has turned up. Manufacturing employment
increased for a third month in March, and the number of temporary jobs
— often a precursor of more permanent employment — has been rising
since last October. New claims for unemployment insurance continue on a
generally downward trend. However, if the pace of recovery is moderate,
as I expect, a significant amount of time will be required to restore
the 8-1/2 million jobs that were lost during the past two years. I am
particularly concerned about the fact that, in March, 44 percent of the
unemployed had been without a job for six months or more. Long periods
without work erode individuals skills and hurt future employment
prospects. Younger workers may be particularly adversely affected if a
weak labor market prevents them from finding a first job or from gaining
important work experience.

On the inflation front, recent data continue to show a subdued rate
of increase in consumer prices. For the three months ended in February,
prices for personal consumption expenditures rose at an annual rate of
1-1/4 percent despite a further steep run-up in energy prices; core
inflation, which excludes prices of food and energy, slowed to an annual
rate of 1/2 percent. The moderation in inflation has been broadly based,
affecting most categories of goods and services with the principal
exception of some globally traded commodities and materials, including
crude oil. Long-run inflation expectations appear stable; for example,
expected inflation over the next 5 to 10 years, as measured by the
Thomson Reuters/University of Michigan Surveys of Consumers was 2-3/4
percent in March, which is at the lower end of the narrow range that has
prevailed for the past few years.

Financial Market Developments

Financial markets have improved considerably since I last testified
before this Committee in May of last year. Conditions in short-term
credit markets have continued to normalize; spreads in bank funding
markets and the commercial paper market have returned to near precrisis
levels. In light of these improvements, the Federal Reserve has largely
wound down the extraordinary liquidity programs that it created to
support financial markets during the crisis. The only remaining program,
apart from the discount window, is the Term Asset-Backed Securities Loan
Facility for loans backed by new-issue commercial mortgage-backed
securities, and that facility is scheduled to close at the end of June.
Overall, the Federal Reserves liquidity programs appear to have made a
significant contribution to the stabilization of the financial system,
and they did so at no cost to taxpayers and with no credit losses.

The Federal Reserve also recently completed its purchases of $1.25
trillion of federal agency mortgage-backed securities and about $175
billion of agency debt. Purchases under these programs were phased down
gradually, and to date, the transition in markets has been relatively
smooth. The Federal Reserves asset-purchase program appears to have
improved market functioning and reduced interest-rate spreads not only
in the mortgage market but in other longer-term debt markets as well.

On net, the financial condition of banking firms has strengthened
markedly during recent quarters. Last spring, the Federal Reserve and
other banking regulators evaluated the nations largest bank holding
companies under the Supervisory Capital Assessment Program, popularly
known as the stress test, to ensure that they would have sufficient
capital to remain viable and to lend to creditworthy borrowers even in a
worse-than-expected economic scenario. The release of the stress test
results significantly increased market confidence in the banking system.
Greater investor confidence in turn allowed the banks to raise
substantial amounts of new equity capital and, in many cases, to repay
government capital. The Federal Reserve and other bank regulators
continue to encourage the banks to build up their capital, ensure that
they have adequate liquidity, improve their risk management, and
restructure their employee compensation programs to better align risk
and reward.

Despite their stronger financial positions, banks’ lending to both
households and businesses has continued to fall. The decline in large
part reflects sluggish loan demand and the fact that many potential
borrowers no longer qualify for credit, both results of a weak economy.

The high rate of write-downs has also reduced the quantity of loans
on banks’ books. Banks have also been conservative in their lending
policies, imposing tough lending standards and terms; this caution
reflects bankers’ concerns about the economic outlook and uncertainty
about their own future losses and capital positions.

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** Market News International Washington Bureau: 202-371-2121 **

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