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Financial Planning > Behavioral Finance

Bernanke Cautiously Optimistic on Economy

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In the first round of his semi-annual Humphrey-Hawkins testimony to Congress beginning July 21, Federal Reserve Board Chairman Ben Bernanke said the Fed expects the economy to return to growth mode by year-end and to expand by 2.1% to 3.3% in 2010. However, Bernanke was less sanguine on jobs, suggesting that unemployment will remain above 9% through the end of the year. “Unemployment is going to be high for awhile,” he said in answering a question following his prepared testimony before the House Financial Services Committee, “so it’s not going to feel like a strong economy.” The Fed expects a “gradual recovery,” he said, and “positive job creation by the end of this year, but it will take some time for unemployment to come down.”

Moreover, he warned that the lag in jobs could deter consumer spending and thus further growth.

The big news from Bernanke’s testimony for the markets was that the Fed would not consider raising interest rates until the job market and other signs of economic growth showed signs of improvement.

In his testimony before the Senate Banking Committee on July 22, Bernanke warned of the economic dangers emanating from growing defaults in commercial real estate.

In his House testimony, Bernanke also called on Congress to control government budget deficits, saying that failure to do so risks “having neither financial stability nor durable economic growth.”

The Fed chairman said the Fed’s “aggressive policy actions taken last fall may well have averted the collapse of the global financial system,” and “many of the improvements in financial conditions can be traced, in part to policy actions taken by the Federal Reserve to encourage the flow of credit.”

As for the Administration’s proposed Consumer Financial Protection Agency (CFPA), Bernanke said that were he crafting financial reform legislation, “I would keep the consumer controls with the federal banking agencies with stronger controls.”


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