Bernanke: Economy improving but still weak

WASHINGTON, July 21 (UPI) -- U.S. Federal Reserve Chairman Ben Bernanke said Tuesday the U.S. economy and financial markets have improved but were still too weak to raise interest rates.

Rates will therefore likely remain "at exceptionally low levels for extended periods," Bernanke told the House Financial Services Committee.

While the pace of economic decline "appears to have slowed significantly," the labor market continues to weaken, he said.

The unemployment rate is currently at a 26-year high of 9.5 percent, and the Fed expects it to rise to 9.8 percent to 10.1 percent by the end of the year.

While financial conditions have shown "notable improvements" the financial system remains stressed, Bernanke said.

He said the Fed wanted "to assure the public and the markets that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation."

Bernanke also told lawmakers the financial turmoil showed that Washington must improve its supervision and regulation of the financial system, holistically and by focusing on specific parts of the economy whose interaction "could pose a significant risk to the overall financial system."

The Fed forecasts a 1 percent to 1.5 percent economic contraction this year followed by a 2.1 percent to 3.3 percent rebound next year.