April 14 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said there are signs that the “sharp decline” in the U.S. economy is slowing, indicating a potential “first step” toward a recovery from the worst recession in a generation.

“I am fundamentally optimistic about our economy,” Bernanke said today in a speech in Atlanta. “Today’s economic conditions are difficult, but the foundations of our economy are strong, and we face no problems that cannot be overcome with insight, patience, and persistence.”

The Fed chief’s remarks suggest he is increasingly confident the central bank’s efforts to revive lending are slowing the contraction and setting the stage for a recovery. The Fed is committed to achieving financial stability, a prerequisite for renewed growth, Bernanke said.

“Recently we have seen tentative signs that the sharp decline in economic activity may be slowing, for example, in data on home sales, homebuilding and consumer spending, including sales of new motor vehicles,” Bernanke said at Morehouse College. “A leveling out of economic activity is the first step toward recovery.”

At the same time, Bernanke said “we will not have a sustainable recovery without a stabilization of our financial system and credit markets.” He added that “we are making progress on that front as well.”

Excerpts from Bernanke’s speech were first published today as an opinion piece in USA Today.

Responding to a question from a panel of students after the speech, Bernanke said the U.S. dollar “remains the dominant currency in terms of reserve holdings and international transactions” and will remain that way for the “foreseeable future.”

‘More Pain’

Separately, President Barack Obama said in a speech that “the severity of this recession will cause more job loss, more foreclosures, and more pain before it ends.”

Obama, speaking at Georgetown University in Washington, said “credit is still not flowing nearly as easily as it should.” He promised “an unrelenting, unyielding, day-by-day effort from this administration to fight for economic recovery on all fronts.”

Economists surveyed by Bloomberg News estimate that the pace of economic contraction eased in the first quarter of this year from the 6.3 percent annual rate in the final three months of 2008. To help end the recession, the Fed has committed to buy $1.45 trillion of housing debt and $300 billion of Treasuries after cutting the benchmark interest rate almost to zero.

“What we don’t need out of our policy makers at this time is pessimism,” said Kurt Karl, chief U.S. economist at Swiss Reinsurance Co. in New York. “One of his roles here is to talk up the resilience of the U.S. economy,” Karl said of Bernanke.

Karl predicts U.S. gross domestic product will resume expansion in the fourth quarter.

Bernanke said in response to another question that he sees “considerable improvement” in some financial markets. He reiterated that the $1-trillion-plus expansion of the Fed’s balance sheet to ease credit is a “strictly temporary measure.”

The Fed chief said the central bank’s decision early this decade to keep the benchmark interest rate at 1 percent didn’t necessarily cause house prices to rise. Some economists have criticized the rate policy as contributing to the boom and bust in the housing market.

‘Grim’ Figures

Dallas Fed President Richard Fisher said in remarks in Hong Kong today that “grim” figures indicate the U.S. economy shrank steeply last quarter. He reiterated his prediction that the jobless rate may exceed 10 percent this year.

Bernanke’s speech was released about the same time as new government figures showed U.S. retail sales fell 1.1 percent in March, following a 0.3 percent gain in February that was stronger than previously estimated.

A report last month showed sales of previously owned homes in the U.S. unexpectedly increased in February as record foreclosures pushed down prices and lured first-time buyers into the market.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

Last Updated: April 14, 2009 15:49 EDT