Federal Reserve Chairman Ben Bernanke testified before the Senate Banking Committee Wednesday, telling members the economic expansion that began in the middle of last year is continuing at a moderate pace. However he said “overhangs “in the market, specifically the slow rebound of the housing market and high unemployment, continue to act as a drag on the nation’s recovery.

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“After two years of job losses, private payrolls expanded at an average of about 100,000 per month during the first half of this year, a pace insufficient to reduce the unemployment rate materially,” he said. “In all likelihood, a significant amount of time will be required to restore the nearly 8.5 million jobs that were lost over 2008 and 2009.”

He added that the Federal Open Market Committee (FOMC) expects continued moderate growth, a gradual decline in the unemployment rate, and subdued inflation over the next several years. Most FOMC participants, he said, expect real GDP growth of 3% to 3.5% percent in 2010, and roughly 3.5% to 4.5% percent in 2011 and 2012. The unemployment rate is expected to decline to between 7% and 7.5 percent by the end of 2012.

“One factor underlying the Committee’s somewhat weaker outlook is that financial conditions–though much improved since the depth of the financial crisis–have become less supportive of economic growth in recent months,” he said.

In response, interest rates are likely to warrant “exceptionally low levels for an extended period.”

The Fed Chairman also touched on last week’s passage of legislation to reform the financial system, which the President signed into law this morning. He called its passage significant progress toward reducing the likelihood of future financial crises and strengthening the capacity of financial regulators to respond to risks that may emerge.

“Within the Federal Reserve, we have already taken steps to strengthen our analysis and supervision of the financial system and systemically important financial firms in ways consistent with the new legislation,” he said.