The text of Federal Reserve Board chairman Ben Bernanke’s text testimony before the Senate Banking Committee yesterday reiterates that the U.S. is in a severe economic contraction that continued into the first quarter and that risks are to the downside, but hints that Fed officials see only modest recovery that might not raise inflation rates any time soon.

Bernanke’s text concentrates on reviewing credit programs, assuring that these steps will ease markets’ ills and indicating that transparency will be enhanced by additional disclosures.

The already-released central tendencies elaborate that a 2% long-term inflation expectation — which the chairman says means over five to six years — should help anchor public expectations and provide “a clearer picture of the FOMC’s strategy,” thus preventing inflation from rising or falling too much.

In perhaps the most telling phrases about Fed expectations, Bernanke said he sees “a reasonable prospect” that recession will end in 2009, and “2010 will be a year of recovery.” But a full recovery, presumably to prior levels of resource utilization, will likely take more than two to three years, Bernanke said.

— Market News International

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