WASHINGTON (MNI) – The following is the first part of the full text
of testimony by Federal Reserve Chairman Ben Bernanke Wednesday before
the House Budget Committee:

Chairman Spratt, Ranking Member Ryan, and other members of the
Committee, I am pleased to have this opportunity to offer my views on
current economic and financial conditions and on issues pertaining to
the federal budget.

The Economic Outlook

The recovery in economic activity that began in the second half of
last year has continued at a moderate pace so far this year. Moreover,
the economy–supported by stimulative monetary policy and the concerted
efforts of policymakers to stabilize the financial system–appears to be
on track to continue to expand through this year and next. The latest
economic projections of Federal Reserve Governors and Reserve Bank
presidents, which were made near the end of April, anticipate that real
gross domestic product (GDP) will grow in the neighborhood of 3-1/2
percent over the course of 2010 as a whole and at a somewhat faster pace
next year.1 This pace of growth, were it to be realized, would probably
be associated with only a slow reduction in the unemployment rate over
time. In this environment, inflation is likely to remain subdued.

Although the support to economic growth from fiscal policy is
likely to diminish in the coming year, the incoming data suggest that
gains in private final demand will sustain the recovery in economic
activity. Real consumer spending has risen at an annual rate of nearly
3-1/2 percent so far this year, with particular strength in the highly
cyclical category of durable goods. Consumer spending is likely to
increase at a moderate pace going forward, supported by a gradual pickup
in employment and income, greater consumer confidence, and some
improvement in credit conditions.

In the business sector, real outlays for equipment and software
posted another solid gain in the first quarter, and the increases were
more broadly based than in late 2009; the available indicators point to
continued strength in the second quarter. Looking forward, investment in
new equipment and software is 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. More generally, U.S. manufacturing
output, which has benefited from strong export demand, rose at an annual
rate of 9 percent over the first four months of the year.

At the same time, significant restraints on the pace of the
recovery remain. In the housing market, sales and construction have been
temporarily boosted lately by the homebuyer tax credit. But looking
through these temporary movements, underlying housing activity appears
to have firmed only a little since mid-2009, with activity being weighed
down, in part, by a large inventory of distressed or vacant existing
houses and by the difficulties of many builders in obtaining credit.
Spending on nonresidential buildings also is being held back by high
vacancy rates, low property prices, and strained credit conditions.
Meanwhile, pressures on state and local budgets, though tempered
somewhat by ongoing federal support, have led these governments to make
further cuts in employment and construction spending.

As you know, the labor market was hit particularly hard by the
recession, but we have begun to see some modest improvement recently in
employment, hours of work, and labor income. Payroll employment rose by
431,000 in May, but that figure importantly reflected an increase of
411,000 in hiring for the decennial census. Private payroll employment
has risen an average of 140,000 per month for the past three months, and
expectations of both businesses and households about hiring prospects
have improved since the beginning of the year. In all likelihood,
however, a significant amount of time will be required to restore the
nearly 8-1/2 million jobs that were lost over 2008 and 2009.

On the inflation front, recent data continue to show a subdued rate
of increase in consumer prices. For the three months ended in April, the
price index for personal consumption expenditures rose at an annual rate
of just 1/2 percent, as energy prices declined and the index excluding
food and energy rose at an annual rate of about 1 percent. Over the past
two years, overall consumer prices have fluctuated in response to large
swings in energy and food prices. But aside from these volatile
components, a moderation in inflation has been clear and broadly based
over this period. To date, long-run inflation expectations have been
stable, with most survey-based measures remaining within the narrow
ranges that have prevailed for the past few years. Measures based on
nominal and indexed Treasury yields have decreased somewhat of late, but
at least part of these declines reflect market responses to changes in
the financial situation in Europe, to which I now turn.

Developments in Europe

Since late last year, market concerns have mounted over the ability
of Greece and a number of other euro-area countries to manage their
sizable budget deficits and high levels of public debt. By early May,
financial strains had increased significantly as investors focused on
several interrelated issues, including whether the fiscally stronger
euro-area governments would provide financial support to the weakest
members, the extent to which euro-area growth would be slowed by efforts
at fiscal consolidation, and the extent of exposure of major European
financial institutions to vulnerable countries.

-more- (1 of 2)

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]