The U.S. economy will see moderate economic recovery in coming quarters, but the country should take actions to tackle its deficit challenge, said Federal Reserve Chairman Ben Bernanke on Wednesday.

"We as a nation face the difficult but essential task of achieving longer-term sustainability of the nation's fiscal position," Bernanke told lawmakers at a Congress hearing.

ECONOMIC OUTLOOK

Bernanke said that supported by stimulative monetary and fiscal policies and the concerted efforts of policymakers to stabilize the financial system, a recovery in economic activity appears to have begun in the second half of last year.

Gross domestic product (GDP), the broad measure of the overall economy, in the fourth quarter of last year increased at an annual rate of 5.6 percent.

According to a Commerce Department report released on Wednesday, retail sales in the country rose 1.6 percent in March, the third consecutive monthly increase.

In a separate report, the Labor Department said that inflation remains tame. Consumer prices edged up 0.1 percent last month. Low inflation gives the Fed leeway to hold interest rates at rock- bottom levels to support the recovery. Despite a steep run-up in energy prices, inflation is under control, Bernanke said.

Bernanke repeated at the hearing the Fed's pledge to keep interest rates at record lows for an "extended period" to boost the recovery. The Fed has been keeping its federal funds rates at a historic low level of zero to 0.5 percent since December 2008.

Although there are more positive signs of economic recovery, the Fed chief warned that significant restraints on the pace of the recovery remain, including weakness in both residential and nonresidential construction and the poor fiscal condition of many state and local governments.

Besides, the labor market was particularly hard hit by the recession.

The unemployment rate has been stuck at 9.7 percent for three straight months, close to its highest levels since the early 1980s.
Bernanke said that the federal budget deficit is on track this year to be nearly as wide as the 1.4 trillion dollars gap recorded in fiscal year 2009. To an important extent, these extremely large deficits are the result of the effects of the weak economy on revenues and outlays, along with the necessary actions that were taken to counter the recession and restore financial stability.

"But an important part of the deficit appears to be structural; that is, it is expected to remain even after economic and financial conditions have returned to normal," he said.

The Obama administration and the Congressional Budget Office ( CBO) project that the deficit will recede somewhat over the next two years as the temporary stimulus measures wind down and economic recovery leads to higher revenues.

However, the annual deficit is expected to remain high through 2020.

The projected deficit to GDP ratio in fiscal year 2010 is about 10.6 percent.

"Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires that policymakers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance," Bernanke said.

"Timely attention to these issues is important, not only for maintaining credibility, but because budgetary changes are less likely to create hardship or dislocations when the individuals affected are given adequate time to plan and adjust," he said.

It was the second time in a week that the Fed chief emphasized the country's deficit issue in public.

Bernanke warned last Wednesday that the U.S. Congress and the White House need to work on a plan to whittle down record-high budget deficits.

"To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above," he noted.

"Addressing the country's fiscal problems will require difficult choices, but postponing them will only make them more difficult," Bernanke said.