Fed sees robust US growth despite euro crisis

(WASHINGTON) - The US economy is on track to grow 3.5 percent this year as it sees only a "modest" impact from the eurozone debt crisis, Federal Reserve chairman Ben Bernanke said Wednesday.

"The economy... appears to be on track to continue to expand through this year and next," Bernanke said in testimony to Congress.

The Fed boss said the pace of recovery would likely quicken in 2011, driven by rising consumer spending, trade and investment.

"The incoming data suggest that gains in private final demand will sustain the recovery in economic activity," he told a House of Representatives panel.

"Consumer spending is likely to increase at a moderate pace going forward, supported by a gradual pickup in employment and income, greater consumer confidence, and some improvement in credit conditions."

US consumers, long the drivers behind the world's largest economy, are spending around 3.5 percent more today than they were this time last year, Bernanke said.

He warned the still-moribund housing market continued to drag on the recovery, as home prices are pushed down by vast numbers of vacant houses and home builders struggle to get credit.

"Underlying housing activity appears to have firmed only a little since mid-2009," he said.

But continuing his recent upbeat tone, Bernanke said that the spiraling European debt crisis should have only a modest impact on the United States.

"If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest."

He said the negative impact of the Europe's crisis was offset by a decline in the US government's cost of borrowing, as investors rush to the perceived safety of Treasury bonds.

Bernanke added that Europe's crimped economy could push down oil prices, a trend that could help US consumers and businesses

But he warned the United States must heed the lessons of fiscal woes seen across the Atlantic.

The US national debt currently stands at an historic high of 13 trillion dollars and government deficits are soaring.

A Treasury Department report recently delivered to Congress showed that this debt is expected to rise to 19.6 trillion dollars by 2015, surpassing 100 percent of gross domestic product.

Bernanke said that while short-term spending had been needed to stimulate the economy, the deficit must be brought down over time.

"Ongoing developments in Europe point to the importance of maintaining sound government finances.

"History makes clear that failure to achieve fiscal sustainability will, over time, sap the nation's economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability.

Later in the day, the Federal Reserve published its latest Beige Book report, which will be used at the next meeting of the central bank's interest-rate-setting panel later this month.

The report said labor market conditions "improved slightly with permanent employment levels edging up in most districts."

"Manufacturing was the most often cited source of employment gains," the Fed said, as many regions also reported an uptick in temporary hires.

US unemployment currently stands at 9.7 percent and remains a major economic and political headache for the administration of President Barack Obama.

During a speech in Virginia on Wednesday, Bernanke warned there would be "no easy resolution to the challenges we face in restoring jobs and strengthening the economy."

The Fed's generally upbeat tone was not enough to buoy investors, who sent US stock markets into the red on Wednesday.

"The overall pace of the recovery remained modest. The recovery still faces stiff headwinds," said Brian Bethune of IHS Global Insight.