WASHINGTON – The U.S. recession appears to be losing steam, with growth likely to resume later this year on the back of firmer household spending, a bottoming housing market and an end to inventory liquidation, U.S. Federal Reserve Chairman Ben Bernanke said Tuesday.
But Bernanke said that the recovery will probably be slower than usual, and warned that the unemployment rate may stay high “for a time” as businesses remain cautious about new hiring, The Wall Street Journal reported.
“We continue to expect economic activity to bottom out, then to turn up later this year,” Bernanke said in prepared testimony to the Congressional Joint Economic Committee.
The “key elements” to that forecast, he explained, “are our assessments that the housing market is beginning to stabilize and that the sharp inventory liquidation that has been in progress will slow over the next few quarters.”
Fiscal and monetary stimulus should support demand, he said.
Responding to questions from lawmakers, Bernanke said Tuesday he foresees “significant” opportunities for banks to raise capital once their stress tests are completed.
Bernanke told the Joint Economic Committee of Congress that the best outcome for the 19 banks being assessed by the government would be to be able to raise new capital without seeking additional help from Treasury.
“I do think that there will be significant opportunities for capital-raising outside the government’s programs,” he said.
However, Bernanke added that it is difficult to say whether the majority of new capital will come from the private sector, since it will depend on the market’s perception of the strength of the banking sector.
When asked about putting taxpayer money at risk to address the financial crisis, Bernanke said he doesn’t expect the central bank’s programs to lose any money.
Bernanke said significant progress has been made in restoring stability to financial markets since a “truly cataclysmic collapse” was averted in September and October of last year.
“The financial markets are still fragile, we don’t want to take anything for granted, but we have come a long way since last fall,” Bernanke told the Joint Economic Committee of Congress.
When asked about the Fed’s program to buy up to $300 billion in Treasurys, Bernanke said the plan isn’t to target interest rates but to inject liquidity into capital markets.
“We’re not trying to target a particular interest rate,” he said. “Our objective is to provide more liquidity into the system and to help private credit markets, and I think it has had some benefit.”
He cited improvements in mortgage and corporate bond markets, in particular.
Bernanke also assured lawmakers the Fed is focused like a “laser beam” on an exit strategy in order to keep inflation low. “We understand the necessity” of winding down the Fed’s monetary stimulus at the appropriate time, Bernanke said.
Bernanke defended the Fed’s actions to protect consumers from abusive credit card practices, as well. Bernanke was challenged during testimony by Sen. Charles Schumer (D., N.Y.) on why the Fed isn’t forcing immediate implementation of a rule barring retroactive increases in credit card rates.
Bernanke replied he is also concerned about reports of retroactive increases in credit card rates, and the Fed is looking into the issue.
Last week, in a cautiously upbeat statement accompanying their decision to hold the target federal funds rate for interbank lending near zero, Fed officials said that the economic outlook has “improved modestly” but activity “is likely to remain weak for a time.”
U.S. gross domestic product has contracted in excess of 6%, at an annual rate, in each of the last two quarters, the worst six-month performance in a half century. But Wall Street economists generally expect stabilization around the middle of the year with a gradual recovery thereafter.
That scenario has found support from recent consumer- and business-sentiment surveys as well as housing and construction figures that have helped push equity markets up sharply. However, grim automobile sales for April suggest consumers remain cautious amid rising unemployment.
Still, Bernanke said there are “tentative signs” that household demand is stabilizing, citing a rise in consumer spending during the first quarter.
“The housing market, which has been in decline for three years, has also shown some signs of bottoming,” he added, citing “fairly stable” existing home sales, firmer sales of new homes and a reduced backlog of unsold new homes. Still, sales levels remain “depressed,” he said.
Meanwhile, “some progress” has been made on inventory adjustment, Bernanke said, and as inventories move into better balance with sales, “a reduction in the pace of inventory liquidation should provide some support to production later this year.”
Even foreign economies appear to be stabilizing, he added, and their financial markets appear to have improved somewhat as well.
Still, Bernanke warned that even when the U.S. recovers, growth is likely to remain below its long-run potential for a while. Many economists assume the economy’s noninflationary potential to be between 2.5 percent and 3 percent.
“We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly,” Mr. Bernanke said. With firms still cautious, the unemployment rate “could remain high for a time, even after economic growth resumes,” Bernanke said, adding that expects “sizable” job losses “in coming months.”
The unemployment rate is currently at a 25-year high of 8.5 percent. Wall Street economists expect the April jobless rate, due for release Friday, to hit 8.9 percent. There are other headwinds, too, Bernanke warned.
“In contrast to the somewhat better news in the household sector, the available indicators of business investment remain extremely weak,” he said, while conditions in commercial real estate “are poor.”
And while financial conditions appear to have improved, markets and institutions “remain under considerable stress,” he said.
“A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall,” Bernanke said.
With a good deal of slack still in the economy, inflation should remain low and come in below its 2008 pace this year, Bernanke said.
“However, inflation expectations, as measured by various household and business surveys, appear to have remained relatively stable, which should limit further declines in inflation,” he said.
Bernanke told lawmakers that the Fed will soon provide additional information on its lending programs, including breakouts of the types of collateral the Fed is accepting.
Fed Vice Chairman Donald Kohn has been leading a review of the Fed’s disclosure policies.
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