Economic Outlook ‘Unusually|Uncertain,’ Bernanke Says

WASHINGTON (CN) - Federal Reserve Chairman Ben Bernanke told lawmakers Thursday that the outlook for the U.S. economy is "unusually uncertain," but said the Fed is prepared to take steps if the economy continues to lag. "We will act if we don't see the kinds of improvements we are hoping for and expecting," Bernanke said.

Bernanke appeared before the House Financial Services Committee on Thursday to deliver his semi-annual report on the economy.

He characterized the pace of economic expansion as "moderate," noting that consumer spending had increased at a rate of 2.5 percent. He said consumer spending is slow due to steady high unemployment, which is making households reluctant to spend.

The nationwide unemployment rate has stayed stubbornly high at around 9.5 percent over the past several months. Bernanke said he expects the jobless rate to remain high through the end of 2012, dipping down to 7 to 7.5 percent.

The private sector added an average of 100,000 jobs per month during the first half of this year, but Bernanke said the pace of growth was "insufficient" to make a dent in widespread unemployment. The economy is still reeling from 8.5 million jobs lost in 2008 and 2009.

Nearly half of the unemployed have been jobless for more than six months. Bernanke said such persistent unemployment "erodes skills and may have long-lasting effects on workers' employment and earnings prospects."

In addition, the housing market remains weak, with the "overhang of vacant or foreclosed houses weighing on home prices and construction," Bernanke said.

The commercial real estate market also continues to shrink due to tight credit conditions and high vacancies, though Bernanke said the rate of decline may be slowing.

Small businesses still have difficulty obtaining credit, and Bernanke said the Federal Reserve is encouraging banks to lend to creditworthy small businesses.

Bernanke said he and his team "expect continued moderate growth, a gradual decline in the unemployment rate, and subdued inflation over the next several years."

Federal stimulus spending was crucial to economic recovery in the short-term, he said, adding that the country needs to focus on trimming the budget in the long-term.

"We should maintain our stimulus in the short term and we need to take steps to improve our fiscal situation in the longer term," he said.

Rep. Spencer Baucus, R-Ala., blamed the "extended period of weak recovery" on Democratic policies and government spending.

"In February, I said, 'So the current budget path is not sustainable is it?'" Bachus told Bernanke. "You said, 'Given the numbers at Congressional Budget Office and Office of Management and Budget, that's right.'"

"That's correct," Bernanke said.

"It's actually worse today than it was then, is it not?" Bachus asked.

"I believe so, yes," Bernanke replied. Bachus recounted Bernanke urging Congress to come up with an immediate plan for a "sustainable fiscal exit," which Bernanke confirmed.

"It's very important to demonstrate that we are committed to a medium-term consolidation and stabilization of our fiscal situation," Bernanke said. "I do believe there are things we can do, and we are considering all options."

He said one of the Fed's ideas was better communicate with the public about how Fed policy informs the economic situation. Bernanke said the Fed wants to "clarify our willingness to maintain policy support for the economy" in what an amounts to a public relations campaign to foster public trust.

Bernanke said they are also considering lowering the interest rate on excess reserves, now at 0.25 percent, and expanding the Fed's balance sheet by purchasing additional securities.

He said the central bank has already purchased $1.5 trillion dollars of securities, which has "eased financial considerations quite considerably."

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