Bernanke Says Recovery Possible This Year If Programs Work

Tuesday, 24 Feb 2009 11:03 AM

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WASHINGTON – Federal Reserve chairman Ben Bernanke said Tuesday he sees a "reasonable prospect" for an end to the deep recession this year if the numerous rescue and stimulus programs work as intended.

But he warned in his semiannual address to Congress that a full economic recovery could take more than two or three years.

Bernanke was guarded in his outlook and noted that the US economy is in the midst of a "severe contraction" that has continued into the first quarter of 2009.

Despite numerous downside risks to the outlook, Bernanke said a variety of initiatives appear to be steadying jittery financial markets, and if these work as intended, the recession could end in 2009.

"It is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets," he said.

"If actions taken by the administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability -- and only if that is the case, in my view -- there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery."

But he argued that Fed policymakers believe "that a full recovery of the economy from the current recession is likely to take more than two or three years."

Unemployment was expected to remain at high levels through 2011, which would be a drag on economic activity, the Fed chairman noted.

While maintaining his forecast for a slow recovery, Bernanke also said there is a risk of a further deepening of the recession.

"This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside," he said.

He said that because of the global nature of the slowdown, the US economy might be dragged down further by weakness in its trading partners.

"Another risk derives from the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing," he said.

"To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets."

Bernanke delivered the Fed's economic projections, which had been released last week by the central bank. These were sharply downgraded from the prior outlook in October and call for a contraction in the world's biggest economy of between 0.5 and 1.3 percent for 2009.

The Fed is calling for a gradual recovery with growth slowly resuming by the end of the year and picking up to a range of 2.5 to 3.3 percent in 2010.

The unemployment rate is expected to jump from the current level of 7.6 percent to between 8.5 and 8.8 percent by the end of 2009.

Inflation is expected to remain tame, in a range of 0.3 percent to 1.0 percent in 2009 and 1.0 to 1.5 percent in 2010.

Bernanke noted that traditional monetary policy moves were no longer available with the federal funds rate near zero, but reiterated the Fed's commitment to "using all available tools" to get credit flowing to boost the economy.

The Fed chief said there little encouraging economic news in recent data.

"The deteriorating job market, considerable losses of equity and housing wealth, and tight lending conditions have weighed down consumer sentiment and spending," he told the Senate Banking Committee in prepared testimony.

"In addition, businesses have cut back capital outlays in response to the softening outlook for sales as well as the difficulty of obtaining credit."

He pointed out that US exports, which held up growth last year, have faltered amid weakness in the global economy.

But he noted that efforts in the US and other economies to ease credit since last year "have helped to restore a degree of stability to some financial markets."

He said there is some easing of credit for corporate borrowing and US mortgage rates have come down, but that "significant stresses persist in many markets."

Still he argued that the range of initiatives to steady the housing market and provide capital to the banking system "should further stabilize our financial institutions and markets, improving confidence and helping to restore the flow of credit needed to promote economic recovery."

He noted that Fed members last month "anticipated that a gradual recovery in US economic activity would begin in the second half of the year in response to monetary easing, another dose of fiscal stimulus, relatively low energy prices, and continued efforts by the government to stabilize the financial sector and increase the availability of credit."

© 2009 Agence France Presse. All rights reserved.

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