Ben Bernanke, Chairman of the Federal Reserve, struck a note of cautious and qualified optimism regarding the possibility of a sustained recovery in the United States' economy.
On the down-side risks Mr. Bernanke warned that market concerns have mounted over the ability of Greece and other European countries to manage their 'sizable' budget deficits and 'high levels of public debt'; and also the U.S.' own fiscal position had deteriorated 'appreciably'.
Yet, he noted, in a speech before the Budget Committee of the House of Representatives, "The recovery in economic activity that began in the second half of last year has continued at a moderate pace so far this year." He also added that on the inflation front, recent data continued to show a subdued rate of increase in consumer prices.
He added that the labour market, which was hard hit by the recession, had begun to show some 'modest improvement recently', in terms of employment — 431,000 more people were hired in May — hours of work, and labour income.
Markets cheered Mr. Bernanke's comments, rising during trading hours on Wednesday.
Indicating a positive prognosis for economic growth in the U.S., Mr. Bernanke said, "The latest economic projections of Federal Reserve Governors and Reserve Bank presidents… anticipate that real gross domestic product will grow in the neighbourhood of 3.5 per cent over the course of 2010 as a whole and at a somewhat faster pace next year."
Regarding the sources of growth in aggregate demand Mr. Bernanke cautioned that consumer spending was likely to increase at a moderate pace going forward, although it would be supported by a "gradual pickup in employment and income, greater consumer confidence, and some improvement in credit conditions".
Underscoring the role of the business sector in driving growth he said, that looking forward, investment in new equipment and software was expected to be supported by healthy corporate balance sheets, relatively low costs of financing of new projects, increased confidence in the durability of the recovery, and the need of many businesses to replace aging equipment and expand capacity 'as sales prospects brighten'.
Emphasising the risks that still remained in the system, primarily emerging from the turmoil in European markets, Mr. Bernanke noted that U.S. financial markets "have been roiled in recent weeks by these developments, which have triggered a reduction in demand for risky assets". He added that broad equity market indexes had declined, and implied volatility has risen 'considerably'.
However, he said that the actions taken by European leaders represented a firm commitment to resolve the prevailing stresses and restore market confidence and stability. "If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest," Mr. Bernanke added.