Economy to Grow 3-4% in 2011 But Hiring Still Lags: Bernanke

Federal Reserve Chairman Ben Bernanke said Thursday that the US economy is strengthening, with three to four percent growth likely this year, but that it won't reduce unemployment "at the pace we'd like it to."

CNBC/FDIC Small Business Forum
CNBC/FDIC Small Business Forum

"We see the economy strengthening," Bernanke said during a Small Business Forum in Washington DC co-sponsored by the FDIC and CNBC. "It has looked better in the last few months. We think a 3 to 4 percent-type of growth number for 2011 seems reasonable."

"Now that's not going to reduce unemployment at the pace we'd like it to, but certainly it would be good to see the economy growing and that means more sales, more business," he added.

The risk of deflation, meanwhile, "has receded considerably" since August "and so we are moving in the right direction," Bernanke said.

On housing, Bernanke said that mortgage giants Fannie Mae and Freddie Mac have to be reformed to re-establish the soundness of the residential mortgage market.

The housing recovery, he said, is "a slow process."

"It's not going to happen overnight," he said. "The economy's got to come back. Confidence has to come back."

On the current credit squeeze, the Fed chairman said there has to be a balance between banks being cautious with lending and small businesses that are unable to get credit.

"We got into trouble in the first place by making too many bad loans," he said. "So you have to make good loans. And you have to have credit-worthy borrowers. But we can do that by putting in the effort."

Bernanke cited community banks, which have stepped in to make loans that big banks aren't willing to make.

"One of the advantages of community banks is that they have long-standing relationships," he said. "They understand the business better. They know the people. That's one reason why community banks have stepped into the breach...There are substitutes for lazy lending, which is the hard work of understanding the business."

Bernanke's comments came a day after after the Federal Reserve said the battered U.S. labor market may finally be looking up.

The Fed's Beige Book, based on anecdotal reports from the business contacts of the central bank's regional branches, painted an increasingly bright, if cautious, picture.

The findings were consistent with a recent pick-up in U.S. economic data that has prompted some economists to beef up their forecasts for growth in the first half of 2011.

—Reuters contributed to this report.