Bernanke sees gains, though not without reservations

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Federal Reserve Chairman Ben Bernanke told the U.S. Congress that the economy is showing signs of improvement, though he couched his testimony with more caveats than are in the fine print of most promotions for time share resorts.

Are things getting better? The former chair of Princeton University's economics department seemed to be saying "yes" -- at least sort of. Spooked by Bernanke's reserve, investors responded to his testimony by pushing stocks down.

"Conditions in a number of financial markets have improved in recent weeks, reflecting in part the somewhat more encouraging economic data," he said in his written testimony. "However, financial markets and financial institutions remain under considerable stress, and cumulative declines in asset prices, tight credit conditions, and high levels of risk aversion continue to weigh on the economy."

For instance, the most recent data on the number of new and continuing claims for unemployment insurance through late April suggests that there will be further "sizeable" job cuts. The Fed Chairman argued the recent data shows the pace of contraction may be slowing.

Like other economists, Bernanke noted that there are some signs of bottoming in the housing market, though activity may be elevated as more foreclosed properties go onto the market. Commercial real estate remains "poor" while spending on equipment and software fell at an annual rate of about 30 percent in both the fourth and first quarters.

Bernanke argued to the Joint Economic Committee that the results of the bank stress tests -- which critics say are pointless -- were delayed to make sure that they were accurate. He also denied that "too big to fail" was an official government policy and that he ordered Bank of America Corp. (BAC) Chief Executive Kenneth Lewis to keep quiet about the problems with the Merrill Lynch acquisition.

One thing that Bernanke did not do was stick his neck out, pointing out that the recovery may not feel like much of one at first.

"We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, implying that the unemployment rate could remain high for a time, even after economic growth resumes," he said.

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