Bernanke says U.S. recovery ahead, housing near bottom

By Mark Felsenthal and Alister Bull

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke said on Tuesday the three-year U.S. housing bust may be near a bottom and the recession should end this year, as long as there is no relapse of the credit squeeze that has strangled the economy.

In March, Bernanke had pointed to "green shoots" of economic recovery, but in testimony to Congress on Tuesday he was more explicit in saying the pieces were in place for a rebound. Still, he acknowledged that growth would remain subdued and unemployment high even after the recession ends.

He also said "stress tests" to assess the capital needs of the 19 largest U.S. banks will provide an accurate reflection of the firms' financial positions, and he expected those which need a bigger buffer to raise the money from private sources.

"We continue to expect economic activity to bottom out, then to turn up later this year," Bernanke told the congressional Joint Economic Committee.

"An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall."

U.S. stock markets have rallied in recent weeks, with the Standard & Poor's 500 index up 35 percent from an early March low, on hopeful signs that consumer spending was stabilizing and the decline in the housing market was abating. A somewhat stronger than expected reading on the U.S. services sector on Tuesday bolstered that view.

Senator John Ensign said Bernanke told Republican lawmakers that the U.S. economy could grow 2 percent next year and 4 percent in 2011. That was slightly less optimistic than a Fed forecast released in February.

Bernanke said that even when recovery takes hold, it is likely to be tepid and unemployment may not peak until 2010, although it would likely not climb into double digits.

Excess economic slack should keep inflation low, he said, suggesting the Fed -- the U.S. central bank -- will keep interest rates low for some time as well.

The Fed dropped benchmark overnight interest rates to near zero in December. After a two-day meeting last week, it repeated that it would likely hold borrowing costs at an unusually low level for "an extended period."

Stephen Stanley, an economist at RBS Securities in Greenwich, Connecticut, said Bernanke's comments were "undoubtedly significantly more upbeat than his last congressional appearance in February."

Economists think the United States is further along the road to economic recovery than Europe, thanks in part to the Fed's aggressive response. The International Monetary Fund last month said Europe's recession will drag into 2010.

Despite Bernanke's brighter economic view, U.S. stock markets slipped on Tuesday, giving back some of the gains racked up a day earlier, while prices for government debt were slightly higher.

BAILOUT MONEY

U.S. regulators were expected to brief banks on Tuesday on the findings of their bank stress tests, which aimed to determine whether the firms have enough capital to withstand a deeper downturn. They will announce results on Thursday.