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Troubles in housing and construction deter full recovery: Bernanke

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Federal Reserve Chairman Ben Bernanke painted a bleak picture of the nation's housing market Tuesday, saying "all segments of the construction industry remain troubled" and home buying is down with potential borrowers stumbling over tighter lending standards, falling home prices and a bleak jobs market that has undercut consumer confidence. Despite the housing sector's standard role as one of the lynch pins to recovery, Bernanke's outlook for the industry is weak. Nonetheless, there was no hint that the Fed may adopt a third round of quantitative easing, as some economist speculate. "Despite the slightly more downbeat tone on the economic recovery, Bernanke didn't offer any hints that QE3 could be coming soon. Somewhat surprisingly, he even admitted that "monetary policy cannot be a panacea," said Paul Ashworth, chief US economist for Capital Economics. "We wouldn't completely rule out QE3, but not until next year at the earliest and even then only if the Fed is trying to offset what Bernanke warned today could be an increasing fiscal drag on the recovery." Bernanke attributed the recent upswing in inflation to rising energy and commodity prices. Despite inflationary fears stemming from the Fed's accommodative fiscal policy, the Fed chair said current forecasts expect inflationary pressures to wane in the months ahead. "The housing sector typically plays an important role in economic recoveries; the depressed state of housing in the United States is a big reason that the current recovery is less vigorous than we would like," the Fed chairman reported. While speaking at the International Monetary Conference in Atlanta, Bernanke also blamed limited jobs for the recovery's tepid pace. The Fed chairman said fiscal policymakers will continue struggling with two competing forces: a need to encourage the federal government to set its finances on a "sustainable trajectory, and the need to do so without jumping too far ahead with plans that undercut a recovery. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation," Bernanke said. "Besides the prospect of more-stable commodity prices, two other factors suggest that inflation is likely to return to more subdued levels in the medium term," Bernanke said. "First, the still-substantial slack in U.S. labor and product markets should continue to have a moderating effect on inflationary pressures. Notably, because of the weak demand for labor, wage increases have not kept pace with productivity gains. Thus the level of unit labor costs in the business sector is lower than it was before the recession." And even as the U.S. economy's aggregate output increased 1.8% at an annual rate in the first quarter, Bernanke said unemployment is hindering a recovery. "Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers," Bernanke said. Write to Kerri Panchuk.

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