Fed boss likely to sound more hopeful on economy

[January 07, 2011]  WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke goes to Capitol Hill on Friday more confident about the economy and the outlook for hiring, but not enough to pull back from the Fed's $600 billion bond-buying program.

Bernanke's testimony before the Senate Budget Committee is his first congressional appearance since the Fed announced in November it planned to buy $600 billion in Treasurys through June. The bond purchases are designed to boost the economy by lowering interest rates and lifting stock prices.

The program has been criticized by Republicans in Congress and some Fed officials who contend it will do little to help the economy and could hurt it by unleashing inflation and speculative buying on Wall Street. The move heightened tensions with trading partners including China, Germany and Brazil. They complained it was really a scheme to push down the value of the dollar, giving U.S. exporters a competitive edge.

Bernanke is expected to defend the program and signal the Fed intends to spend the full amount as scheduled, while also delivering a more encouraging message about the economic outlook for 2011.

"The economy seems to be moving in the right direction. But he'll also caution that now is not the time for the Fed or for Congress to pull up supports," said Ken Mayland, president of ClearView Economics.

Factories are cranking up production. The service sector is growing at its fastest pace in more than four years. Fewer people applied for unemployment benefits over the past month than in any other four-week period in more than two years. Consumers are spending more freely, and a payroll tax cut is likely to boost their activity further. All that suggests hiring will accelerate in the months ahead.

Bernanke's testimony is scheduled to start one hour after the government releases its December jobs report. Economists are predicting that employers added 145,000 new positions last month and the unemployment rate dipped to 9.7 percent.

"The Fed chief will talk about improvements in the economy and will sound more optimistic," said James O'Sullivan, economist at MF Global. "But he'll caution that unemployment is historically high and has a long way to go to get back to normal.

Bernanke has said it could take four or five years for unemployment to drop to a historically normal, 5.5 percent to 6 percent. That's why O'Sullivan and other economists predict Bernanke will make the case that bond-buying program is still needed.

Economists and Fed officials think Congress' tax-reduction plan will help bolster the economy this year and should spur more hiring.

The tax package extends tax cuts enacted by President George W. Bush in 2001 and 2003, gives a pay raise to working Americans by lowering the Social Security payroll tax, provides tax breaks to businesses and extends unemployment benefits. The package has a price tag of $858 billion over two years.

Similarly, economists predict Bernanke will argue for Congress and the White House to come up with a long-term plan to reduce the government's trillion-plus-dollar budget deficits.

President Barack Obama's debt commission at the end of last year failed to reach a consensus on what to do about exploding deficits. Over the coming decade government deficits are estimated in the $10 trillion range. If Congress fails to come up with a plan to curb those deficits in the long run, the economy could be hurt, Bernanke is likely to say. Big deficits could force investors to demand more returns to loan out their money to the government. Interest rates could soar, crimping spending and slowing the economy.

Risks still lurk, the Fed said earlier this week. Foreclosures could press down home prices more and further weaken the housing market. Trying to balance their budgets, struggling state and local governments could cut spending more deeply and lay off more workers. Those forces would weigh on the economy's growth.

[Associated Press; By JEANNINE AVERSA]

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