UPDATE 1-U.S. economy not "out of woods"-Bernanke

Wed Apr 7, 2010 4:34pm EDT

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By Ed Stoddard

DALLAS, April 7 (Reuters) - The U.S. economy still faces significant headwinds, including a housing sector that has yet to recover convincingly and an ailing employment market, Federal Reserve Chairman Ben Bernanke said on Wednesday.

In a speech that suggested the central bank chief was in no rush to begin raising interest rates, Bernanke outlined a number of challenges to the country's growth outlook.

"Many Americans are still grappling with unemployment or foreclosure, or both," Bernanke said in prepared remarks to the Dallas Regional Chamber of Commerce. "We are far from being out of the woods.

In particular, Bernanke flagged continuing weakness in housing as a danger to the recovery, which he nonetheless said would be sustainable enough to bring down the unemployment rate slowly over time.

"We have yet to see evidence of a sustained recovery in the housing market," he said.

Against that backdrop, the Fed chairman saw no immediate reason to be worried about inflation, which he characterized as "well controlled."

In addition, inflation expectations, which Fed officials have singled out as a crucial guidepost for policy, appear to be stable, Bernanke said, both as measured by market indicators and surveys.

"Several comments by Bernanke reinforce the sense that he does not favor policy tightening given the challenges facing an economy operating well below its potential," Goldman Sachs' New York-based U.S. economists wrote in a research note.

In response to the worst financial crisis since the Great Depression, the Fed slashed interest rates close to zero and undertook a host of emergency measures in an effort to thaw frozen credit markets.

Some investors are betting the central bank could begin tightening policy in the second half of this year. Others believe lingering economic fragility will keep the Fed on hold until at least 2011.

Bernanke said the Fed's ability to prevent future crises will hinge in part on the development of a resolution authority that would allow regulators to break up or wind down large financial institutions that run into trouble in an orderly fashion.

He said the Fed had already made significant changes to its regulatory approach to reflect lessons learned from the crisis.

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