Bernanke says low rates still needed

The chairman of the U.S. Federal Reserve, Ben Bernanke, on Tuesday said low interest rates are still needed and job growth is still too slow to see the recovery clearly take hold.

His comments were his first public assessment of how much the U.S. economy has weakened since April, when he said temporary factors like high gas prices were largely to blame for weaker growth at the start of the year.

Data released since then has showed weaker hiring in May, falling home prices and a drop in manufacturing.

During his speech in Atlanta to a banking conference, Bernanke acknowledged that some job creation momentum has been lost in the labour market, but said temporary factors, such as higher gas prices and the crisis in Japan, are the main causes of a softening economy. He predicted growth would pick up in the second half of the year.

"Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers," Bernanke said.

He made no mention of any new steps the Fed might take to boost the economy.

The Fed's $600 billion US Treasury bond-buying program is scheduled to end on June 30. The program was intended to keep interest rates low to strengthen the economy. But critics said it raised the risk of high inflation.

Markets fall 

Soon after Bernanke began speaking, U.S. stocks fell. The Dow Jones industrial average erased most gains made earlier in the day to close down 19.15 points at 12,070.81.The Nasdaq composite index slipped one point to 2,701.56 while the S&P 500 index was off 1.23 points to 1,284.94.

 In Toronto, the S&P/TSX composite index lost 35.74 points to 13,282.92.

Bernanke said that consumer inflation has jumped 3.5 per cent in the six months ending in April — well above the average of less than one per cent over the preceding two years. But he noted that most of the increase has been caused by higher gas prices, which have been creeping down in recent weeks. Excluding food and energy, inflation has been tame, he noted.

He also urged U.S. lawmakers not to make sudden, large cuts to government spending.

"Policymakers urgently need to put the federal government's finances on a sustainable trajectory," he acknowledged. "But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery."

Job creation slows

Last Friday, the government reported that the unemployment rate ticked up in May to 9.1 per cent and the economy created just 54,000 jobs, the fewest in eight months.

That's far below the average of 220,000 jobs per month that were created during the previous three months.

Bernanke's speech came two weeks before the central bank's monetary policy committee meets. It has held interest rates at record lows since December 2008 to boost the economy after the worst economic downturn since the 1930s.

The recession officially ended in June 2009. But growth has been subpar compared with previous recoveries. Among the reasons are continued problems in housing and a huge overhang of government and personal debt.