WRAPUP 5-Bernanke grows more confident in U.S. recovery

* Bernanke somewhat more upbeat, but cautious

* Says high jobless rate, low inflation still risks

* Sees “moderately stronger” growth in 2011
(Adds comments from Chicago Fed’s Evans)

By Pedro Nicolaci da Costa

WASHINGTON, Jan 7 (BestGrowthStock) – The U.S. economy may finally
be hitting its stride even if growth remains too weak to put a
real dent in the nation’s jobless rate, Federal Reserve
Chairman Ben Bernanke said on Friday.

Offering no real clues on the future direction of monetary
policy, Bernanke sounded cautiously more upbeat than he had in
his most recent public remarks. He cited improvements in
consumer spending and a drop in jobless benefit claims as
hopeful signs a languid recovery was perking up.

“We have seen increased evidence that a self-sustaining
recovery in consumer and business spending may be taking hold,”
the central bank chief said in his first testimony to Congress
since the Fed launched a controversial plan to buy an extra
$600 billion in government bonds.

Just a month ago, in an interview on the CBS program “60
Minutes,” Bernanke voiced a degree of trepidation about the
economy’s rebound.

His remarks on Friday were made public just an hour after
the government reported the economy generated a disappointing
103,000 jobs in December.

Bernanke, who said it would take four to five years for the
labor market to get back to normal, showed no inclination
toward cutting short the Fed’s bond purchase program, designed
to stimulate the economy. But he also offered no hints of
further buying beyond the program’s June deadline.

“The Fed will not rush for the exit,” said Lena Komileva,
economist at Tullett Prebon. “The potential for further
(easing) remains if weak labor and housing activity continue to
depress inflation trends.”

Financial markets, which focused on the new jobs data,
showed little reaction to Bernanke’s remarks.

The U.S. jobless rate dropped to 9.4 percent in December,
the lowest rate since May 2009 and down from 9.8 percent a
month earlier, but the decline was partly due to a troubling
rise in the number of people exiting the workforce.
[ID:nN06134458]

Echoing Bernanke, Fed Board Governor Elizabeth Duke said in
a separate speech that the recovery appeared to be gathering
steam, but both hiring and inflation would likely remain
subdued.

“I am encouraged by signs that the recovery may have gained
traction recently,” Duke said.

The improvement in the economic backdrop has prompted Wall
Street investors to begin pondering a possible reversal in Fed
policy as early as the end of this year. In the summer, few
expected anything in the way of monetary tightening until at
least 2012.

Highlighting lingering concern at the Fed about how deep a
hole the economy must climb out of, another official emphasized
that the bond-buying program had been necessary to lift a
recovery that was too weak to dent high unemployment.

“More recent data have been coming in somewhat stronger,”
Chicago Fed President Charles Evans said in a speech. “But they
do not yet point to the kind of robust, self-perpetuating
recovery that we need in order to close today’s large resource
gaps within a reasonable amount of time.” [ID:nNLL7CE7RY]

Evans is one of the most outspoken backers of aggressive
Fed actions to spur growth, and is a voter on the central
bank’s policy-setting panel in 2011.

DEFLATION RISK SMALLER, NOT GONE

In his testimony to the Senate Budget Committee, Bernanke
defended the Fed’s bond purchases by highlighting the weakness
in employment and what he saw as the risks associated with very
low rates of inflation.

“Persistently high unemployment, by damping household
income and confidence, could threaten the strength and
sustainability of the recovery,” Bernanke said.

“Very low inflation increases the risk that new adverse
shocks could push the economy into deflation. Deflation induced
by economic slack can lead to extended periods of poor economic
performance.”

Many conservative Republicans have blasted the bond-buying
plan as risking inflation. The tone of the hearing, however,
was largely respectful, although Republican Senator Jim
Sessions of Alabama said he did not share Bernanke’s confidence
that the central bank would be able to withdraw its stimulus in
time.

Addressing the budget deficit, a hot topic in Washington
now that newly empowered Republicans are pushing for spending
cuts, Bernanke urged lawmakers to take a go-slow approach.

“Fiscal policy makers will need to continue to take into
account the low level of economic activity and the
still-fragile nature of the economic recovery,” he said.

At the same time, Bernanke came down hard on what he
described as an unsustainable long-term fiscal path.

“Doing nothing will not be an option indefinitely,”
Bernanke said. “Diminishing confidence on the part of investors
that deficits will be brought under control would likely lead
to sharply rising interest rates on government debt, and,
potentially, to broader financial turmoil.”

He threw his support behind proposals to reform the tax
code, saying lower rates and fewer loopholes were needed to
make the system more efficient.