UPDATE 2-Bernanke says joblessness to linger despite growth

Thu Jan 13, 2011 4:25pm EST

* Fed chairman's growth outlook brightens

* Bernanke says jobless rate still to recede slowly

* Deflation risk has receded-Bernanke (Adds details, background)

By Dave Clarke

ARLINGTON, Va., Jan 13 (Reuters) - The outlook for the U.S. economy has brightened, Federal Reserve Chairman Ben Bernanke said on Thursday, though he warned that growth this year won't be strong enough to bring down the jobless rate as speedily as policy makers would like.

"We see the economy strengthening. It has looked better in the last few months. We think a 3 to 4 percent-type of growth number for 2011 seems reasonable," Bernanke said at an event sponsored by the Federal Deposit Insurance Corporation.

"That's not going to reduce unemployment at the pace we'd like it to, but certainly it would be good to see the economy growing and that means more sales, more business," he added.

Bernanke's forecast suggests prospects have improved somewhat in policy makers' eyes since November, when the Fed anticipated the economy would expand in a range of 3 percent to 3.6 percent.

The Fed in November launched its controversial $600 billion bond-buying program to spur more robust growth and bring down the unemployment rate.

Since then a number of economic indicators, ranging from retail sales to trade figures, have suggested the U.S. recovery has picked up speed, and Bernanke's assessment has grown rosier.

Last week he told Congress that it increasingly appeared that a self-sustaining recovery was taking hold. [ID:nN06147394]. He sounded a similar note on Thursday.

"We're seeing some improvement in the labor market. I think deflation risk has receded considerably. And so we're moving in the right direction," he said.

A debate looms for the Fed, which meets on Jan. 25-26, about whether to carry the bond buying through to the program's intended conclusion in the middle of the year. A number of Fed officials have signaled a desire to complete the purchases.

Although the program is intended to keep a lid on longer-term interest rates, they have risen since November -- a trend that some critics contend shows the program is ineffective.

Bernanke, however, argued that higher interest rates reflected stronger growth and more confidence in the health of the economy. "Interest rates are higher, but I think that's mostly because the news is better. So I think the policy has helped," he said.

Fed policies have also helped strengthen the stock market, the Fed chairman added.

Despite signs of improvement, data on Thursday showed headwinds continue to buffet the recovery. The number of people filing first-time claims jobless benefits last week hit the highest level since October, while producer prices shot higher last month. [ID:nN13271305]

Addressing concerns that tighter government oversight has stifled bank lending, Bernanke said the thrust of recent legislation -- enacted in the wake of the devastating 2007-2009 financial crisis -- was ensuring that the largest banks do not pose a risk to the broader financial system.

Banks will need to strengthen their balance sheets and make loans based on borrowers' ability to repay, rather than simply against collateral, he said. Bernanke said he expects small business lending to improve in 2011. For more on regulators views on small business lending, see [ID:nN1395039]

A Fed report showed on Thursday that large financial institutions eased credit terms for hedge funds, insurance companies, and other types of borrowers. [ID:nWALDCE7X7] (For more stories on Fed policy go to [FED/AHEAD]) (Reporting by Dave Clarke; Writing by Pedro da Costa and Mark Felsenthal; Editing by Gary Crosse and Leslie Adler)