The U.S. economy is bottoming out and is likely to turn upward later this year, Federal Reserve Board Chairman Ben Bernanke said Tuesday.
"The recent data ... suggest that the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, may be stabilizing," Bernanke said in testimony prepared for delivery to the Joint Economic Committee.
Bernanke's optimistic comments add to the sense that Fed officials believe their unprecedented actions over the past year are sufficient to generate a recovery.
The Fed has slashed its interest-rate target to effectively zero and taking over the job of pumping credit into the economy from the crippled banking and securitization markets. The Fed is also buying Treasury securities and mortgage debt.
Many economists believe the Fed's policies may ultimately be inflationary, but Bernanke betrayed no hint of fear of rising prices.
"In this environment, we can anticipate that inflation will remain low," Bernanke said.
One reason prices will not spike is that the recovery is likely to be subpar and only gradually gain momentum, Bernanke said.
In addition, the labor market will continue to be weak "in coming months," he said.
Another reason is that consumer expectations about prices have remained stable.
Economists believe the Fed will be slow to remove their support for the economy. Rates are expected to stay in the range slightly above zero through the end of the year.
Bernanke's optimism came with important caveats.
While conditions in financial markets have improved and a gradual repair of the banking system is underway, any reversals on these two fronts would darken the economic outlook, he said.
The results of the government's stress test for major banks are expected to be released later this week
Bernanke's remarks put some flesh on the bones of the recent Fed policy statement, which saw nascent signs of recovery. See full story.
Bernanke said that the housing market, which has been in the intensive care unit for three years, has shown signs of renewed vigor.
The drop in economic activity overseas may also be improving, he said.
Business investment remains weak, Bernanke said. But companies have slashed inventories and production could turn around, he said.
Many economists and Fed officials are focusing on the Fed's "exit strategy." Many believe the Fed will have to be quick to hike rates and sell some of the securities that it has bought over the past year.
