Bernanke: Economy not 'out of the woods'

By Colin Barr, senior writer

(Fortune) -- The economy seems to be recovering but is "far from being out of the woods," Federal Reserve chief Ben Bernanke said in a speech Wednesday.

Bernanke, speaking before the Dallas Regional Chamber business group, said unemployment remains one of the "toughest problems" for policymakers, and one that he expects to ease only gradually.

The economy has 'stabilized' but joblessness remains a problem, Federal Reserve chairman Ben Bernanke said Wednesday.

Bernanke said he expects the Fed's easy money policies and a gathering recovery "will be sufficient to slowly reduce the unemployment rate over the coming year" from its current level of 9.7%. But he admitted that the jobless rate remains a major concern.

"The economy has stabilized and is growing again, although we can hardly be satisfied when 1 out of every 10 U.S. workers is unemployed and family finances remain under great stress," Bernanke said.

The Fed chief also noted that bank lending continues to be weak and inflation expectations stable. Those observations should allow the central bank to continue to hold short-term interest rates near zero percent for what the Fed has called an "extended period" while keeping prices stable.

Fed meeting transcripts released Tuesday show some officials remain concerned that the economy could slip from its recent recovery track in the second half, as companies work through inventories accumulated in the downturn and fiscal stimulus payments slow.

Signs that the recovery is faltering could prompt officials to expand their support for the markets and delay a long-awaited policy tightening.

Investors have been anxious to see the Fed tighten monetary policy after nearly a year and a-half of near-zero interest rates. In the past two months, the Fed has ended a year-long bond purchase program and raised the rate it charges banks for emergency borrowing.

Among those seeing a need to tighten policy is Kansas City Fed President Thomas Hoenig. In a speech Wednesday in New Mexico, he called for the Fed to drop its extended-period commitment and to "sometime soon" begin raising the key fed funds overnight lending target to 1% from its recent range of 0%-0.25%.

That said, the Fed has made clear it's in no hurry to tighten policy, with the recovery in its earliest stages and so many Americans out of work.

Bernanke also questioned whether still-weak property markets could continue to hamper consumers and the financial system.

"Mortgage delinquencies for both subprime and prime loans continue to rise as do foreclosures," he said. "The commercial real estate sector remains troubled, which is a concern for communities and for banks holding commercial real estate loans."

Bernanke also said the United States must confront its profligate ways sooner rather than later if it is to avoid a fiscal crisis. Americans will have to make tough choices on the balance between higher taxes and lower spending on various priorities, he said.

Investors have been fretting about the nation's grim budget picture and its need for overseas financing, though a sale of government bonds Wednesday shows demand for U.S. debt hasn't ebbed.

"Unless we as a nation demonstrate a strong commitment to fiscal responsibility, in the longer run we will have neither financial stability nor healthy economic growth," Bernanke said. To top of page