NEW YORK (MarketWatch) -- The U.S. economy still faces considerable challenges, but the most likely outcome is moderate economic growth with subdued inflation, Federal Reserve Chairman Ben Bernanke said Monday.
"I expect moderate economic growth to continue next year," Bernanke said in remarks prepared for delivery to the Economic Club of New York. "Final demand shows signs of strengthening, supported by the broad improvement in financial conditions."
However, "significant economic challenges remain," the head of the central bank said. "The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible."
Unfortunately, economic growth probably won't be strong enough to significantly reduce the unemployment rate. A jobless recovery is possible, at least at the beginning.
The outlook for inflation is similarly mixed, he said. "Inflation seems likely to remain subdued for some time," he said, despite the recent increases in commodity prices.
In a departure from normal practice that no official except the Treasury secretary comment on the dollar, Bernanke said the Fed is committed to a strong dollar. "We are attentive to the implications of changes in the value of the dollar," he said, adding that Fed policy would "help ensure that the dollar is strong and a source of global financial stability
Bernanke's remarks on the economy were more detailed than recent statements by the policy-setting Federal Open Market Committee, but were similar in nature.
He repeated that the FOMC anticipates that "exceptionally low" interest rates are likely to persist for "an extended period." But he cautioned that the FOMC's forecast is only a forecast, and that "significant changes in economic conditions or the economic outlook would change the outlook for policy as well."
Bernanke's tone was cautiously upbeat. He recognized that some analysts see the recent improvement in U.S. growth as being mostly the result of temporary factors -- such as the boost from inventory reduction or the stimulus from the government's "cash-for-clunkers" program -- that will leave the economy gasping.
"My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely," Bernanke said. Growth reflects some fundamental improvements in consumer spending, home building, credit conditions and export markets, he said.
Two major factors will temper growth in the next year, he said: constrained bank lending and the weak job market.
The extraordinary actions taken last year by the Fed and other central banks "were instrumental in bring our financial system and economy back from the brink," he said.
Big firms and those with access to equity and other highly liquid markets have access to credit, but small companies and households that rely on bank lending are still facing a credit squeeze.
"Reduced bank lending may well slow the recovery by damping consumer spending, especially on durable goods, and by restricting the ability of some firms to finance their operations," he said. In addition, "limited credit could hinder job growth."
Businesses remain very cautious. They cut even more jobs than would be expected from the large decline in output, he said. Once demand begins to strengthen, companies will increase the hours of their current staff before hiring new workers, he predicted.
"Jobs are likely to remain scarce for some time, keeping households cautious about spending," Bernanke said. Payrolls should begin to grow again, as demand rises and companies increasingly find their work force stretched too thin to meet their customers' needs.
But with 100,000 new jobs needed each month just to absorb population growth, "the unemployment rate likely will decline only slowly if economic growth remains moderate, as I expect."
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