Economy will rebound soon, Bernanke says

WASHINGTON — Federal Reserve Chairman Ben Bernanke predicted Tuesday the economy will rebound from its anemic start of the year even if the housing slump persists. Wall Street slid, taking the news as a sign the Fed won't lower interest rates.

Economic growth in the year's first three months nearly stalled, logging just a 0.6 percent pace. It was the worst quarterly showing in more than four years.

However, Bernanke said he believes some forces that figured prominently in that poor performance — including a bloated trade deficit, cutbacks by businesses in inventory investment and weak federal defense spending — "seem likely to be at least partially reversed in the near term."

Bernanke made his comments via satellite to an international monetary conference in Cape Town, South Africa. In his talk, he stuck to the Fed's forecast that the economy in coming quarters will advance "at a moderate pace, close to or slightly below the economy's trend rate of expansion." A copy of his prepared remarks was made available in Washington.

Some economists put the economy's trend, or normal growth rate, at around 3 percent to 3.25 percent.

On Wall Street, stocks fell as investors took Bernanke's remarks to suggest the Federal Reserve has little reason to lower interest rates any time soon. The Dow Jones, having slid more than 100 points earlier in the session, closed down 80.86 points to 13,595.46.

The Fed meets next on June 27-28, and many economists predict policymakers will again hold a key interest rate steady at 5.25 percent, where it has been for a year. "The Fed remains comfortably on the sidelines," said Scott Anderson, economist at Wells Fargo Economics. Many economists think rates will stay where they are for the rest of this year.

Even with Bernanke's hopeful outlook, the Fed chief made clear once again that the painful residential real-estate bust, which started last year, "appears likely to remain a drag on economic growth for somewhat longer than previously expected," he said.

Residential construction will likely remain "subdued for a time" until builders can pare down a backlog of unsold new homes, he noted.

But, thus far, the housing market's problems haven't spread through the broader economy in a significant way, Bernanke said. "We have not seen major spillovers from housing onto other sectors of the economy," he observed.