RTTNews - Federal Reserve Chairman Ben Bernanke told the House Committee on the Budget Wednesday that the economic contraction may be slowing, although there will likely be a significant increase in job losses and unemployment in the next few months. He also warned of the potentially dire consequences of allowing the deficit to remain high, and called on Congress to consider long-term steps for fiscal balance.

According to the latest data, there will likely be sizable job losses and further increases in unemployment are likely over the next few months, Bernanke said in prepared testimony.

However, he added that the same data also suggests that the economy will likely slow its pace of contraction, on the back of improved consumer sentiment and consumer spending that has stopped its freefall and been relatively flat since January.

Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions, the Fed Chairman added.

Activity in the embattled housing market has suggested some signs of bottoming, Bernanke added. Specifically, sales of existing homes have stabilized, and sales of new homes have flattened although both remain at depressed levels.

Overall the Fed Chairman reiterated his forecast that economic activity will turn up later in 2009. However, even after Gross Domestic Product turns positive, the recovery is likely to be slow as the unemployment rate continues to rise even after economic growth resumes.

We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly, Bernanke said.

Inflation is expected to remain low in the face of sizable economic slack, and is likely to move down even further over the next year. But the further declines should be limited, Bernanke added, in the face of an improving economy and stable inflation expectations.

While financial markets remain stressed, Bernanke pointed out several areas that show stabilization, helped in part by the Federal Reserve lending programs. Evidence of stabilization is found in a decreased demand for the lending programs, an encouraging sign.

Bernanke also commented on the staggering deficit, estimated at $1.8 trillion in 2009, $1.3 trillion in 2010, and $900 billion in 2011. He warned that it is dangerous to sustain that level of deficit in the long term, and called on Congress to begin planning now for the restoration of fiscal balance.

Addressing the country's fiscal problems will require a willingness to make difficult choices, he warned. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation's economic resources to devote to federal government programs, including entitlement programs.

In particular, over the longer term, achieving fiscal sustainability--defined, for example, as a situation in which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth--requires that spending and budget deficits be well controlled, he added.

While the recession poses a formidable challenge to the Obama administration and Congress, Bernanke urged that the near-term concern of economic recovery not cloud the long-term goal of reducing the deficit.

Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth, he warned.

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