Fed chairman expects to see signs of recovery by year's end

The nation's ailing economy should begin to show signs of recovery by year's end, but that will be of little consolation to millions of additional Americans who will be losing their jobs well into 2010, Federal Reserve Chairman Ben Bernanke testified Tuesday before the Joint Economic Committee.

There already are flickers of hope in the economy, Bernanke said. Consumer spending grew in the first quarter. The housing market is showing signs that it has bottomed out: Mortgage rates are down; inflation is low; some large banks showed a first-quarter profit. But even if the economy continues to improve, businesses will be slow to rehire workers, Bernanke said.

That will mean a sizable job loss in coming months, even though the economy has already shed 5 million jobs in the past 15 months, he said.

The unemployment rate, which jumped from 8.1 percent to 8.5 percent in March when more than 660,000 more jobs were lost, will surge past 9 percent in early 2010, Bernanke said. The Fed expects the rate to begin to decline before it reaches 10 percent, he said. "We expect the recovery will only gradually gain momentum and that economic slack will diminish slowly," Bernanke said. In particular, businesses are likely to be cautious about hiring, implying that the unemployment rate could remain high even after economic growth returns.

Committee members quizzed Bernanke about whether it was fair for the Fed to spend hundreds of billions of dollars to bail out financial institutions while doing little to aid consumers. "People feel like everyone is running to the rescue of Wall Street with fire engines, but they see themselves being consumed by that fire," Rep. Elijah Cummings, D-Md., said.

Sen. Charles Schumer, D-N.Y., called it unconscionable that the Fed has not acted more quickly to crack down on practices by credit card companies that have caused cardholders' interest rates to soar with little cause. The Fed developed rules that would ban such practices but delay implementation until next year. Congress is pushing legislation that would implement similar restraints more quickly. Bernanke said moving more quickly to clamp down on credit card companies at a time when credit is tight will prompt them to pre-emptively raise rates and revoke credit currently offered to higher-risk consumers.