Bernanke cautious on economic recovery

Federal Reserve Chairman Ben S. Bernanke forecasted a "moderate economic recovery" in congressional testimony Wednesday morning, offering a cautious tone that suggests he has not dramatically upgraded his expectations for the economy based on a recent spate of positive economic data.

In recent weeks, there have been a series of positive readings on the economy, including news that job growth was its strongest in three years in March and a report Wednesday that March retail sales rose a strong 1.6 percent. But in describing his view of the economic outlook to the Joint Economic Committee, Bernanke sounded the same restrained tone in describing his expectations that he did in testimony back in the winter.

"On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters," Bernanke said in prepared testimony. He added later that, "if the pace of recovery is moderate, as I expect, a significant amount of time will be required to restore the 8 1/2 million jobs that were lost during the past two years."

Bernanke also spelled out some of the remaining risks to growth.

"To be sure, significant restraints on the pace of the recovery remain, including weakness in both residential and nonresidential construction and the poor fiscal condition of many state and local governments."

Real estate activity has been a drag on growth for years now, but Bernanke had not previously emphasized the role that state budget cuts could have on overall economic activity.

"Pressures on state and local budgets, though tempered by ongoing federal support, have led to continuing declines in employment and construction spending by state and local governments."

Bernanke also returned to a topic he discussed in a speech last week, the nation's fiscal imbalances, urging Congress and the administration to chart a path toward a more sustainable budget picture in the medium to long term.

"Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires that policymakers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance," Bernanke said, arguing that developing such a plan could keep long-term interest rates low and thus boost economic growth more immediately.

Bernanke has taken a more assertive tone on fiscal policy since being confirmed for a second four-year term as Fed chairman in late January.