Nov. 16 (Bloomberg) — Federal Reserve Chairman Ben S.
Bernanke said economic “headwinds” of reduced bank lending and
a weak labor market will probably restrain the pace of the U.S.
economic recovery, warranting continued low borrowing costs.

“Significant economic challenges remain,” Bernanke said
in a speech today to the Economic Club of New York. “The flow
of credit remains constrained, economic activity weak and
unemployment much too high. Future setbacks are possible.” He
added that the Fed is “attentive” to changes in the dollar’s
value and “will help ensure that the dollar is strong.”

The central bank chief gave no indication he favors raising
interest rates anytime soon. Bernanke repeated the key sentence
from the Nov. 4 statement of Fed policy makers, who reiterated
that interest rates will stay very low for an “extended
period” as the central bank seeks to maintain a recovery from
the deepest recession since the 1930s.

“Of course, significant changes in economic conditions or
the economic outlook would change the outlook for policy as
well,” Bernanke said in Manhattan in his first talk since the
Fed’s Open Market Committee met this month. The Fed has a “wide
range of tools” for tightening credit “when the economic
outlook requires us to do so,” he said.

Retail Sales Rise

A government report today showed October retail sales in
the U.S. rose 1.4 percent, more than anticipated, as demand for
autos climbed, easing concern households will curtail spending
after government incentives ended. A report from the Federal
Reserve Bank of New York today showed manufacturing in the
region expanded in November for a fourth straight month.

“The increases in productivity we have seen so far are so
large, so strong, that I am a bit skeptical they can be
maintained going forward,” Bernanke said in response to a
question after the speech. Firms will find that “as demand
begins to strengthen they will need to bring more workers back
on.”

U.S. stocks rose, with the Standard & Poor’s 500 Index
increasing 1.8 percent to 1,113.27 at 2:21 p.m. in New York.
Treasuries extended gains, pushing the yield on the 10-year note
down eight basis points, or 0.08 percentage point, to 3.34
percent.

The dollar, which traded at $1.4969 against the euro before
the speech, declined to $1.5002.

The U.S. currency saw a “marked increase” because
investors flocked to stronger markets during the financial
crisis, Bernanke said. Now that markets have improved and the
global economy has stabilized, “these safe haven flows have
abated, and the dollar has accordingly retraced its gains. The
Federal Reserve will continue to monitor these developments
closely,” he said.

Dollar Value

“We are attentive to the implications of changes in the
value of the dollar and will continue to formulate policy to
guard against risks to our dual mandate to foster both maximum
employment and price stability,” Bernanke said. “Our
commitment to our dual objectives, together with the underlying
strengths of the U.S. economy, will help ensure that the dollar
is strong and a source of global financial stability.”

The recent increase in commodities prices probably reflects
a global economic expansion, especially in emerging markets, and
the decline in the dollar, he said.

“It is inherently extraordinarily difficult to know
whether an asset’s price is in line with its fundamental
value,” Bernanke said in response to an audience question.
“It’s not obvious to me in any case that there’s any large
misalignments currently in the U.S. financial system.”

Gold Climbed

The price of gold has climbed 54 percent in the past year
to $1,134.88 an ounce, reaching a record today for the fourth
time in six sessions. Crude oil is up 77 percent in 2009.

Bernanke’s remarks on the dollar “strike me as ineffectual
jawboning,” given it was at the end of a speech about why the
Fed isn’t prepared to raise interest rates, said Stephen
Stanley, chief economist at RBS Securities Inc. in Stamford,
Connecticut.

“I’m sure the Fed wants world peace too, but there’s only
one way that the Fed can strengthen the dollar, and Bernanke was
crystal clear that the FOMC is not going there for ‘an extended
period,” said Stanley, a former Fed economist.

The Fed, while trying to pull the economy from the
recession, has held the benchmark lending rate close to zero
since December while using asset purchases as its main policy
tool. The $1.4 trillion in purchases of housing debt are set to
end in March, while the Fed completed buying $300 billion of
Treasuries in October.

Economic Growth

The unprecedented monetary stimulus helped fuel a 3.5
percent pace of growth during the third quarter. Economists
expect an expansion of 2.6 percent next year and 3 percent in
2011, the median estimates in a Bloomberg News survey of
forecasters this month. Fed policy makers gave updated economic
projections at the last FOMC meeting, which will be released
Nov. 25 as part of minutes of the session.

“I expect moderate economic growth to continue next
year,” the 55-year-old chairman said, without giving a specific
forecast. Demand is showing “signs of strengthening,” and
housing, even with “important problems” such as foreclosures,
may “become a small positive for growth” in 2010, he said.

Bernanke devoted the majority of his speech to bank lending
and the labor market, saying they are “two of the principal
factors that may constrain the pace of the recovery.”

“Banks’ reluctance to lend will limit the ability of some
businesses to expand and hire,” Bernanke said. “I expect this
situation to normalize gradually, as improving economic
conditions strengthen bank balance sheets and reduce
uncertainty; the fallout for banks from commercial real estate
could slow that progress, however.”

Record Low

The Fed said last week that U.S. banks kept tightening
lending standards for companies and consumers last quarter,
reinforcing the central bank’s decision to leave its benchmark
interest rate at record lows for a long time. At the same time,
the number of banks making it tougher to borrow diminished, the
Fed said in its quarterly Senior Loan Officer survey.

Bernanke said the labor market is an “area of great
concern.” The U.S. jobless rate rose to 10.2 percent in
October, the first time it’s exceeded 10 percent since 1983, and
an additional 190,000 cuts from payrolls brought job losses to
7.3 million since the recession began in December 2007.

“Jobs are likely to remain scarce for some time, keeping
households cautious about spending,” Bernanke said. “As the
recovery becomes established, however, payrolls should begin to
grow again, at a pace that increases over time.”

Growth Moderate

Still, “the unemployment rate likely will decline only
slowly if economic growth remains moderate, as I expect,” he
said.

Inflation “seems likely to remain subdued for some time,”
Bernanke said, echoing the Nov. 4 FOMC statement that said price
increases will stay “subdued for a time” given “stable”
expectations for longer-term inflation.

The Fed’s preferred inflation gauge, which excludes food
and energy prices, rose 1.3 percent in September from a year
earlier, below the 2 percent goal preferred by the majority of
Fed policy makers.