Bernanke: Recovery Slower Than Expected

(Bernanke speech article updated with additional commentary, quotes and stock prices.)

JACKSON HOLE, Wy. ( TheStreet) -- Federal Reserve Chairman Ben Bernanke said that "for much of the world, the task of economic recovery and repair remains far from complete," but he expects the U.S. economy will continue to grow in the second half of this year and into 2011, "albeit at a relatively modest pace."

Speaking at the annual Federal Reserve symposium in Jackson Hole, Wy. Friday morning, Bernanke conceded that "in many countries, including the United States and most other advanced industrial nations, growth during the past year has been too slow and joblessness remains too high."

Wall Street reacted quickly. The major indexed dipped Friday morning just as Bernanke began his speech, but swiftly returned to positive territory, closing the day sharply higher. The SPDR S&P 500 ( SPY), an exchange-traded fund that tracks the broad-based S&P 500 index, rose 1.6% at the closing bell. The SPDR Dow Jones Industrial Average ( DIA) and PowerShares QQQ Trust ( QQQQ) added 1.7% and 1.2%, respectively.

Bernanke indicated the Fed may implement large purchases of longer-term debts if needed to prevent the economy from falling further. "I believe that additional purchases of longer-term securities, should the Federal Open Market Committee choose to take them, would be effective in further easing financial conditions," he said.

The Bernanke-led F.O.M.C. is the policy-setting arm of the Federal Reserve.

Bernanke said deflation was "not a significant risk for the United States at this time," and that "the F.O.M.C. will strongly resist deviations from price stability in the downward direction."

"Stronger household finances, rising incomes, and some easing of credit conditions will provide the basis for more-rapid growth in household spending next year," he said.

Robert Pavlik, chief market strategist at Banyan Partners, said "Bernanke fulfilled his fatherly role to the markets, saying things are tough, but they're not that bad. And he said if things get worse, 'I've got some ideas. I've got some ways to address the market.'"

"He's telling us what we want to hear. The economy is not the greatest, but it's not the worst. When you read the summary of Bernanke's speech , it's not that great. But read the whole thing, and it's not that bad," Pavlik said.

Investors were eager to hear the chairman's outlook on the economy in light of a roster of mixed and often disappointing economic data recently released -- particularly in the housing market. Market watchers were also hoping the chairman would address whether he believes the recovery remains intact and what policy tools can be used to bolster the economy.

The U.S. economy is still in a soft patch but a double-dip recession is unlikely, St. Louis Federal Reserve Chairman James Bullard said in appearance on CNBC Friday morning. He said we're in a difficult period for formulation monetary policy and that the recovery has gone "reasonably well" until it slowed down this spring given the severity of the shock of the financial crisis in 2008.

Bullard said the Fed is contemplating more quantitative easing measures, but any new programs should be disciplined.

Bullard said the economic outlook is still positive overall, and will continue to pick up in the second half of this year and into 2011. Even so, he conceded that the economy is currently softer than the Fed had expected it to be.

Gross domestic product in the second quarter was downwardly revised to 1.6%, the Department of Commerce reported early Friday, from a previous reading of 2.4%. Despite the revision, the economic growth rate managed to top economists' expectations for a pace of 1.4%.

The University of Michigan said its index of consumer sentiment for August came in at a final reading of 68.9, from a prior reading of 69.6, disappointing economists who expected the figure to be flat.

In the still-struggling housing sector, data released this week showed sales of newly built homes fell 12.4% in July to a new record-low rate, while existing home sales plummeted 27.2% last month. Both sets of data came in far worse than expected.

The data sparked a heated debate among readers of TheStreet. Join the discussion here.

Record-low and near-record-low mortgage rates have failed to spark demand for housing in recent months, but clearly had an effect on homeowners looking to lower their monthly payments.

Mortgage applications rose 4.9% in the week ended Aug 20, the Mortgage Bankers Association said Wednesday. Refi applications accounted for 82.4% of all applications last week, up from 81.4% in the prior week, and the highest share observed since January 2009.

The average rate on a 30-year fixed mortgage fell to 4.55% last week, the MBA said. It was the lowest rate ever recorded in the survey, falling from 4.6% in the prior week.

>> Mortgage Applications Rise on Refi

Fears of a stalled recovery returned to the forefront after the Federal Reserve Bank of Kansas City said Thursday manufacturing activity in the region slowed significantly in August as the index fell to 0 from July's reading of 14.

The news offset earlier optimism after the Labor Department reported a better-than-expected decline in the number of people filing for jobless benefits

-- Written by Miriam Marcus Reimer in New York.

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