In a testimony delivered before the Joint Economic Committee, U.S. Congress in Washington, D.C., Federal Reserve Board Chairman Ben Bernanke offered his views on recent economic developments, the outlook for the economy and current condition in financial markets - most notably pointing to the evidence that the economy may be bottoming out and is likely to turn upward later this year.

The U.S. economy has contracted sharply since last autumn, but recent data suggest that the pace of contraction may be slowing, and they include some tentative signs that the economy may be stabilizing. Consumer spending, which dropped sharply in the second half of last year, grew in the first quarter. In coming months, households' spending power will be boosted by the fiscal stimulus program, and we have seen some improvement in consumer sentiment. Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the declines in equity and housing wealth that households have experienced over the past two years. In addition, credit conditions for consumers remain tight.

The housing market, which has been in decline for three years, has also shown some signs of leveling. Sales of existing homes have been fairly stable since late last year, and sales of new homes have firmed a bit recently, though both remain at depressed levels. Although some of the boost to sales in the market for existing homes is likely coming from foreclosures, the increased affordability of homes appears to be contributing more broadly to the steadying demand for housing. In particular, the average interest rate has dropped almost 1-3/4 percentage points since August, to about 4.8%. With sales of new homes up a bit and starts of single-family homes little changed from January through March, builders are seeing the backlog of unsold new homes decline - a precondition for any recovery in homebuilding.

We can expect economic activity to turn up later this year. The housing market is beginning to stabilize and the sharp inventory liquidation that has been in progress will slow over the next few quarters. An important caveat is that this forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall.

Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, implying that the unemployment rate could remain high for a time, even after economic growth resumes.

In this environment, we anticipate that inflation will remain low. Indeed, given the sizable margin of slack in resource utilization and diminished cost pressures from oil and other commodities, inflation is likely to move down some over the next year relative to its pace in 2008. However, inflation expectations, as measured by various household and business surveys, appear to have remained relatively stable, which should limit further declines in inflation.

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