Bernanke: Growth, Inflation Still Missing Fed Goals

The U.S. economic recovery still needs help from the Federal Reserve despite signs of improvement, the central bank's chairman Ben Bernanke said on Thursday.

The Fed chairman provided a modestly more rosy outlook for the world's largest economy than he has done in recent appearances, citing gains in household spending, improved confidence, and stepped up bank lending as signs 2011 may bring stronger growth than 2010.

"Although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain stubbornly below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate," he said in an appearance at the National Press Club in Washington.

The event marks the second time Bernanke has spoken at the Press Club and taken questions from reporters afterwards. He said the central bank is considering holding more regular press conferences as part of improving its communications with the public.

His comments on the economy on Thursday suggest a Fed that believes it has plenty of time to let its policies boost growth and pull down a high unemployment rate before it needs to worry about tightening financial conditions to keep any inflation in check.

"We continue to see the Fed as making good on its intent to purchase $600 billion in long-term Treasury securities by the end of the second quarter," Barclays Capital economist Michael Gapen wrote in a note to clients. "We also believe that the chairman has the votes needed to pursue further asset purchases should he think conditions warrant."

The hard hit job market shows some grounds for optimism, but modest growth and cautious hiring suggest that it will be several years before the jobless rate returns to a more normal level, Bernanke said.

"Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," he said.

Some analysts worry the Fed is underplaying gains in the recovery and is turning a blind eye to inflation pressures that may be building as evidenced by rising commodity prices around the world.

Economic data on Thursday pointed to stronger growth momentum, as the U.S. services sector grew at its fastest pace in more than five years, factory orders picked up and claims for jobless benefits fell off sharply.

"It seems to me that the chairman seems to be glass half-empty," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut. "There are all these inflation concerns that are hitting the long-end of the bond market.

Bernanke played down worries that recent commodity price rises pose an inflation threat.

"Overall inflation remains quite low," he said.

U.S. Treasury bond prices extended losses after Bernanke's comments.

The Fed in November launched a new round of bond-buying, to be completed by mid-year, to support a recovery that appeared to be flagging. The U.S. central bank had already bought $1.7 trillion worth of longer-term assets to provide further stimulus for the economy after cutting benchmark short-term rates to near zero in December 2008.

The Fed chairman defended the central bank's controversial bond buying program, saying its benefits are evident from a range of financial market metrics. He cited higher stock prices and less volatility in equities markets, and narrower spreads between riskier and less risky corporate bonds.

Bernanke is due to appear before the House of Representatives budget panel to discuss fiscal issues next week.

He urged Congress to take steps to cut the federal budget deficit to take the budget off an "unsustainable" path.