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Bernanke: Economy will improve over rest of 2011 and 2012

By Scott Spoerry, CNN Senior Producer
  • U.S. economy's growth rate will pick up over the rest of 2011, to nearly 3 percent, says Fed chairman
  • Bernanke: "The pace of the economic recovery will pick up..."
  • Labor market continues to show weakness, he says

Washington (CNN) -- The U.S. economy's growth rate will pick up over the rest of 2011, to nearly 3 percent, according to projections presented to Congress Wednesday by Federal Reserve Chairman Ben Bernanke.

In the Fed's twice yearly monetary report to Congress, Bernanke said in prepared testimony that growth in the first half of the year slowed from an annual rate of 2-3/4 percent in 2010 to only 2 percent so far this year. But the Fed chairman said the combined assessment of the Federal Open Market committee is, "that the pace of the economic recovery will pick up," adding that the "central tendency" of the FOMC projections is for growth of 2.7 to 2.9 percent annual growth over the full year (which implies an even higher growth rate for the second half of 2011 by itself).

"Notably better performance that we have seen so far," which includes a projection of 3.3 to 3.7 percent growth for 2012, is the way Bernanke described the economy for the medium term.

The Fed says the latest unemployment data attests to the weakness of the labor market and forecasts an unemployment rate of 8.6 to 8.9 percent for the fourth quarter of this year, with a reduction to 7.8 to 8.2 percent at the end of 2012 and 7.0 to 7.5 percent by the end of 2013.

Bernanke says employment was significantly improved by the recent round of quantitative easing which injected another $600 billion dollars into the financial system, which could have added about 30,000 new jobs per month, or about 700,000 over two years.

But the Fed seems to be having it both ways in terms of growth, saying that their growth projections for 2011 and 2012 are half of a percentage point lower than what they assumed just three months ago, in April.

The Fed says that "temporary" factors like prices of energy, especially gasoline, have limited the impact of the payroll tax reductions and other items passed by Congress to accelerate growth. But Bernanke insisted that the "apparent stabilization in the prices of oil and other commodities should ease the pressure on household budgets."

The Fed also says that auto parts shortages that have pushed up car and truck prices should also ease as the Japanese economy continues to recover from the multiple disasters it suffered earlier this year.

The Fed chairman also laid out two scenarios for the economy and how the Fed might react.

First, Bernanke said "the possibility remains that the recent economic weakness may prove more persistent than expected and deflationary risks might reemerge," which would need additional policy support. Bernanke explained how the purchase of securities by the Fed served the same purpose as conventional monetary policy, lowering interest rates, and he said the Fed still has tools available to ease financial conditions even further.

Scenario two would be an economy that begins growing stronger than expected. If so said Bernanke, the Fed "has been giving careful attention to an exit strategy." Such a policy would include the Fed reducing its balance sheet, effectively pulling money out of the financial system. That would start with Fed ceasing the reinvestment of principal and interest payments into securities.

Bernanke said such changes in policy would be reflected in its statement at the same time or shortly thereafter.

The Fed would eventually raise interest rates under this scenario, and Bernanke said from that point on, raising the key federal funds interest rate would be the primary tool for tightening monetary policy.