Ben Bernanke sees uncertainty. Businesses report growth.

Ben Bernanke, chairman of the Federal Reserve, told senators that the economic outlook 'remains unusually uncertain.'

Molly Riley/Reuters
Federal Reserve Board Chairman Ben Bernanke testifies before the Senate Banking, Housing and Urban Affairs Committee in a hearing July 21. He told senators that the economic outlook was 'unusually uncertain.'

Fears of another economic slowdown have reached America's central bank.

In a sobering assessment of the US economy Wednesday, Fed Chairman Ben Bernanke told the Senate banking committee that employment growth will be weaker than previously expected and that "the economic outlook remains unusually uncertain."

That prognosis was enough to send the stock market reeling. On Wednesday, the Dow Jones Industrial Average fell immediately and ended the day down 109 points to close at 10,120.53. The Standard & Poor's 500 index and Nasdaq also declined. But on Thursday, Dow futures were up sharply before trading, suggesting that the markets were poised for a sharp rebound, based on a string of strong earnings reports from companies.

That's the dichotomy investors face. Businesses are telling a more optimistic story than the economic signals are.

Mr. Bernanke's uncertainty is widely shared at the Federal Open Market Committee, the Fed's policymaking arm. "Most participants viewed uncertainty about the outlook for growth and unemployment as greater than normal, and the majority saw the risks to growth as weighted to the downside," he said.

One big factor is the euro area's debt crisis, which has caused investors worldwide to rein in risk and pull back from investments in stocks. Another is the stubborn contraction of bank lending, especially to small business.

"Small businesses, which depend importantly on bank credit, have been particularly hard hit," Bernanke told the committee.

The result is that job growth is likely to be weak. That means the unemployment rate will decline only slowly, reaching 7 to 7-1/2 percent by the end of 2012, the Fed chairman said.

Still, the Fed expects US economy to grow by 3 to 3.5 percent this year and 3.5 to 4.5 percent next year, adjusting for inflation.

"We remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability," Bernanke said.

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