Fed's Bernanke: Unemployment to peak at up to 10.1% this year

— -- Federal Reserve Chairman Ben Bernanke told Congress Tuesday that the central bank expects unemployment to peak later this year, voicing a more optimistic outlook than many economists.

In a semiannual report to Congress, Bernanke also reassured investors worried about inflation that the Fed eventually will be able to reverse an extraordinary initiative to pump cash into frozen financial markets. And he warned the House Financial Services Committee that proposed legislation to audit the central bank could compromise its independence and rock financial markets.

On unemployment, the Fed projected in meeting minutes released last week that the jobless rate — now 9.5% — could rise as high as 10.1% later this year before falling to as low as 9.5% by the end of 2010 and as low as 8.4% by the end of 2011.

Bernanke's remarks Tuesday suggest Fed policymakers don't believe unemployment will exceed 10.1% or continue rising early next year.

"That shows a little more confidence in the recovery," says Nigel Gault of IHS Global Insight.

Many economists, including Gault, expect the jobless rate to peak in the first half of next year, with IHS forecasting a high of 10.3%. Still, Bernanke added unemployment would likely remain "well above" healthy levels through 2011.

Some investors worry that Fed moves to pump liquidity into markets and lower interest rates by snapping up $1.75 trillion in government securities will eventually make it tough to raise rates to stave off inflation.

Bernanke aimed to defuse those worries, saying the market-priming measures "can be withdrawn in a smooth and timely manner as needed." For example, he said the Fed could sell the securities or raise interest rates on cash held at the Fed by banks, among other steps that would boost interest rates in the market. Investors cheered, driving up Treasury prices.

Committee Chairman Barney Frank, D-Mass., said he was more concerned about "a premature unwinding" of the stimulus that derails a recovery.

But Rep. Ron Paul, R-Texas, said that by snapping up large volumes of securities, "You're in the midst of massive inflation."

Paul has authored a bill, co-sponsored by 274 colleagues, that would for the first time subject the Fed's monetary policy moves to congressional audits. Bernanke opposes the proposal, noting it "could be seen as efforts to try to influence monetary policy," raising inflation fears and interest rates.