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U.S. President Barack Obama talks to a crowd about American energy at Prince George’s Community College in Largo, Maryland, March 15, 2012.

Credit: Reuters/Larry Downing

U.S. Treasury Secretary Timothy Geithner testifies before the Senate Finance Committee hearing on the President’s FY2013 Budget on Capitol Hill in Washington, February 14, 2012.

Credit: Reuters/Yuri Gripas

NEW YORK (Reuters) – The economy shows encouraging signs of early expansion but still faces tough challenges that call for measures to create jobs to help restore fiscal sustainability, Treasury Secretary Timothy Geithner said on Thursday.

In prepared remarks for delivery to the Economic Club of New York, Geithner said the economy was now more productive than it was before the 2007-2009 financial crisis but said confidence remains fragile.

“That is why it is so important that policy makers continue to work to get the economy growing faster in the short term and not shift prematurely to fiscal restraint,” he said.

“We can’t cut our way to growth. Severe austerity now would be very damaging,” he added.

Geithner noted that at the end of 2012, the country faces a simultaneous expiry of tax cuts and big across-the-board spending cuts that together would amount to about five percent of the country’s gross domestic product.

The prospect of such a blow to national output should be a strong incentive for lawmakers to reach some compromises on taxes and spending, he suggested.

Geithner said the Obama administration is aiming for a package of measures that includes some tax increases for wealthy Americans, though that is opposed by Republicans.

“If you do not raise revenues through tax reform, then you have to find another 1 percent of GDP or roughly 1.5 trillion dollars over 10 years in additional savings from defense, Social Security, Medicare, education or low income programs,” he said.

Geithner noted that research shows that recoveries that follow financial crises tended to be “more tentative and uneven” and said it likely will take years to fully repair damage caused by the last one.

At the same time, the administration must try to prepare for a future in which emerging-market countries like Mexico, China and Brazil are getting better at competing and are putting pressure on American jobs.

One way to do that is by reforming a corporate tax system that Geithner described as “a complex and unfair mess of subsidies…with a very high statutory rate” of tax that varies across industries. It needs to be reformed to encourage U.S. businesses to keep production at home, he suggested.

Geithner has previously indicated that he is staying in the Obama administration through this year’s elections but, even if President Barack Obama is reelected, would not be back in a second term.

He said the country can’t let up on the effort to reduce deficits and said Americans should beware of promises that tax cuts can pay for themselves.

“No responsible politician can offer the nation fiscal sustainability through trillions in unpaid-for tax cuts,” Geithner added.

(Reporting By Glenn Somerville; Editing by Diane Craft)

1 of 2. A job seekers holds his binder filled with resumes as he waits in line before speaking with a recruiter during a health care job fair at the Phoenix Convention Center in Phoenix, Arizona November 4, 2009.

Credit: Reuters/Joshua Lott

WASHINGTON (Reuters) – New claims for unemployment benefits fell back to a four-year low last week, a government report showed on Thursday, suggesting further strengthening in the labor market.

Initial claims for state unemployment benefits dropped 14,000 to a seasonally adjusted 351,000, the Labor Department said. That took claims back to a four-year low reached in February.

The prior week’s figure was revised up to 365,000 from the previously reported 362,000. Economists polled by Reuters had forecast claims falling to 356,000 last week.

The four-week moving average for new claims, considered a better measure of labor market trends, was unchanged at 355,750.

First-time applications for jobless benefits have been tucked in a tight range since mid-February, a hopeful sign for the labor market, which has enjoyed three straight months of employment gains above 200,000.

The jobless rate held at a three-year low of 8.3 percent in February.

While the Federal Reserve on Tuesday acknowledged the recent improvement in the labor market, it remained concerned with the still-high unemployment rate.

The U.S. central bank said it expected the jobless rate, which has declined 0.8 percentage point since August, to “gradually” decline.

A Labor Department official said there was nothing unusual in the state-level data and that no states had been estimated.

The number of people still receiving benefits under regular state programs after an initial week of aid declined 81,000 to 3.34 million in the week ended March 3 – the lowest level since August 2008.

Despite the improving labor market picture, long-term unemployment remains a huge problem and about 43 percent of the 12.8 million out of work Americans in February had been jobless for more than six months.

The number of Americans on emergency unemployment benefits fell 53,415 to 2.88 million in the week ended February 25, the latest week for which data is available.

A total of 7.42 million people were claiming unemployment benefits during that period under all programs, up 36,392 from the prior week. (Reporting By Lucia Mutikani; Editing by Andrea Ricci)

1 of 3. Federal Reserve Chairman Ben Bernanke testifies before the Senate Banking Housing and Urban Affairs committee in Washington March 1, 2012.

Credit: Reuters/Gary Cameron

WASHINGTON (Reuters) – The Federal Reserve on Tuesday provided few clues on the prospects for further monetary easing, offering just a slight upgrade to its economic outlook while restating concerns about the high level of unemployment.

The central bank said it expects “moderate” growth over coming quarters with the unemployment rate declining gradually; in January, it said it expected “modest” growth.

It also said a recent spike in energy costs would likely push up inflation, but only temporarily. Over a longer stretch, the Fed said inflation would likely run at or below the its 2 percent target.

“Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated,” the central bank said in a statement after a one-day meeting.

U.S. stocks held gains after the statement and moved higher on news JPMorgan Chase would increase its dividend.

The dollar, meanwhile, hit a fresh 11-month high against the yen, and prices for U.S. government bonds slipped as traders trimmed bets on further bond-buying, or quantitative easing, from the Fed.

“The statement … reflects a further decrease in the odds of further quantitative easing resulting from better recent data,” said Troy Davig at Barclays Capital in New York.

In a further nod to a somewhat brighter outlook, policymakers said financial market strains from the European sovereign debt crisis had eased, although they continued to pose “significant” risks. The policymakers also characterized business investment as rising; in January, they noted it had slowed.

As widely expected, the Fed reiterated its expectation that overnight interest rates would remain near zero until at least through late 2014 and that it would continue its program to reweight its portfolio toward longer-term securities. That program, known as “Operation Twist,” expires at the end of June.

Richmond Federal Reserve Bank President Jeffrey Lacker dissented against the decision because he did not expect economic conditions to warrant ultra-low rates until late 2014. In January, he had dissented against the decision to offer a time frame for the first expected rate hike.

The Fed cut overnight interest rates to near zero in December 2008 and has since bought $ 2.3 trillion in bonds to boost growth. Financial markets are trying to gauge whether policymakers may take fresh steps to stimulate the economy in coming months.

EASING AHEAD?

A quickening in the pace of U.S. jobs growth and a sharp drop in the unemployment rate to 8.3 percent from 9.1 percent in August has led some analysts to rein in their expectations for a further easing of monetary policy.

A report on Tuesday showed retail sales posted their largest gain in five months in February, the latest data to suggest the economic recovery is on a more solid footing.

Even so, Fed officials are uncertain whether the progress in reducing unemployment can be maintained given still-sluggish economic growth, and many economists believe the central bank will launch another round of bond buying later in the year.

In a poll on Friday of firms that trade directly with the Fed, 14 of 18 economists anticipated further quantitative easing. That survey was taken after the government said the economy created more than 200,000 jobs for the third month running in February.

Analysts are looking to the Fed’s two-day meetings in April and June for decisions about any new direction for policy. At both meetings, Bernanke will hold a news conference and officials will make public updated economic and interest rate projections.

Most economists think the economy will expand at about a 2 percent annual rate in the first quarter. Fed Chairman Ben Bernanke said in January it would normally take a growth pace of between 2 percent and 2.5 percent just to hold the jobless rate steady.

While the economic recovery is nearly three years old, officials lament that the United States is still far from full employment. Although the jobless rate has fallen significantly over the last six months, it remains stubbornly high.

(Editing by Andrea Ricci, Tim Ahmann and Andrea Evans)

Federal Reserve Chairman Ben Bernanke testifies before the Senate Banking Housing and Urban Affairs committee in Washington March 1, 2012.

Credit: Reuters/Gary Cameron

WASHINGTON (Reuters) – The Federal Reserve on Tuesday is expected to hold a steady course on monetary policy, acknowledging a mildly brighter economic outlook while refraining from any suggestion that further easing is now off the table.

Indeed, the central bank, sifting through conflicting economic signals, is unlikely to offer much of anything in the way of fresh clues on its policy course after its one-day meeting.

“I just don’t see them being anywhere near ready and certainly not under any pressure to make any judgment this week about which way things are going to go,” said Nigel Gault of IHS Global Insight in Lexington, Massachusetts. “This is really the occasion for them to do absolutely nothing.”

Fed officials are expected to nod to the labor market’s stronger pulse in a statement due at about 2:15 p.m. (1815 GMT). But they are also likely to warn that unemployment is due to decline only gradually given modest demand for goods and services and a still sickly housing market.

Officials may also offer a cautionary note on high energy prices, mindful that a jump in gasoline prices contributed to snuffing out promising signs of recovery last year.

While the Fed’s assessment of the recovery will likely shift in deference to the latest data – including Friday’s report that showed the economy created more than 200,000 jobs for a third month running in February – most analysts expect its words on policy to be nearly identical to its statement after its last meeting in January.

In January, the Fed said it did not expect to raise interest rates until at least late 2014 – 18 months later than its previous estimate, as the Fed voiced caution about the progress in the economy.

The Fed cut benchmark overnight rates to near zero in December 2008 and has bought $ 2.3 trillion worth of bonds to push other borrowing costs lower and stimulate growth.

While the economic recovery is nearly three years old, officials lament that the United States is still far from full employment. Although the jobless rate has fallen significantly over the last six months, at 8.3 percent it remains stubbornly high

Tuesday’s meeting will close without a news conference by Fed Chairman Ben Bernanke or new economic forecasts to offer policy guidance. Instead, details on the thinking behind the Fed’s terse statement will only emerge from speeches by officials and the meeting’s minutes, which are released with a three-week lag.

BETS ON BOND BUYING

While the Fed may be content to bide it’s time for now, policymakers are likely to debate whether the recovery has taken hold enough to keep the quantitative easing spigot shut.

Even after the Labor Department last week reported the economy added 227,000 new jobs in February, economists at the large institutions that trade directly with the Fed believed the central bank would launch another bond-buying spree worth more than $ 500 billion.

Many economists think the central bank may hold off a decision until its June meeting. The Fed is currently reweighting its portfolio to push long-term interest rates lower, a program that runs its course at the end of June.

“Further policy easing remains an option, and any slippage in progress towards full employment will likely be met by additional asset purchases by the Fed,” said Millan Mulraine, senior U.S. strategist for TD Securities in New York.

A Wall Street Journal article on Thursday that said officials were considering buying new bonds but offsetting those purchases with short-term loans to keep the quantity of bank reserves in the system in check fueled speculation that additional purchases were a live option.

Bernanke disappointed some investors by barely mentioning the prospect of an additional round of bond buying in four recent appearances before Congress. Many Republican lawmakers are unhappy with the Fed’s asset purchases, which they view as sowing the seeds of inflation, weakening the dollar, and hurting savers.

Against the good news on the job front, policymakers will likely weigh evidence from other quarters, such as a drop in net exports, which suggested growth slowed to under a 2 percent annual pace in the first three months of this year.

Bernanke and other Fed officials have treated improvements in the jobs picture cautiously, expressing puzzlement about the rapid decline in the unemployment rate against a relatively soft growth backdrop. The jobless rate has dropped 0.8 percentage point since August, when it stood at 9.1 percent.

“I don’t think they’re convinced they won’t need to add additional stimulus, but the tone of data in last three months seems to have been surprising the Fed to the upside,” said Carl Riccadonna, senior U.S. economist for Deutsche Bank in New York.

(Reporting by Mark Felsenthal; Editing by Leslie Adler)