Demand in the US "may be stabilising" Ben Bernanke said on Tuesday, in guardedly optimistic remarks that suggest the recession is likely to end this year.
The Federal Reserve chairman highlighted the recent recovery in consumer spending and said there were "signs of bottoming" in the housing market.
His comments came as main money market rates fell to record lows underscoring recovering confidence among bankers.
The three-month dollar Libor -- the interest rate banks charge each other for three-month dollar loans -- on Tuesday fell below 1 per cent for the first time. Sterling and euro rates were also lower. These rates form the basis of actual borrowing rates for many households and businesses.
In testimony to Congress, Mr Bernanke said banks no longer appeared as concerned about each others' near-term solvency.
With excess inventories being worked out and some improvement in overseas demand "we continue to expect economic activity to bottom out, then to turn up later this year", he said.
A survey of the US services sector activity published on Tuesday also suggested the pace of decline was slowing, though it still pointed to mild contraction.
The Fed chief emphasised that the evidence of stabilisation was "tentative" with better news on the consumer front set against extreme weakness in business investment. "We are likely to see further sizeable job losses and increased unemployment in the coming months," he warned. Recovery would "only gradually gain momentum" and economic slack "will diminish slowly".
Nonetheless, Mr Bernanke said he thought unemployment -- now 8.5 per cent -- would not reach double digits, as some economists feared, and would instead peak "somewhere in the nines".
Mr Bernanke said consumer spending power would be "boosted by the fiscal stimulus". However, he said "the weak labour market and the declines in equity and housing wealth" would weigh on spending.
The Fed chairman appeared confident that the long decline in housing activity was drawing to a close. With mortgage rates down 1.75 per cent since August, "increased affordability of homes appears to be contributing more broadly to the steadying in the demand for housing".
But Mr Bernanke said indicators of business investment "remain extremely weak". While business surveys had "turned a bit more positive" firms were "still reporting net declines in new orders and restrained capital spending plans". He singled out commercial real estate as "poor".
He said the forecast of recovery beginning later this year assumed continued progress in healing the financial system.
Copyright: The Financial Times Limited 2009
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Analysis: Moment of truth