Federal Reserve chairman Ben Bernanke believes there is “a reasonable prospect” that federal government success in restoring financial stability could bring about an end to the recession this year, so that “2010 will be a year of recovery.”
In testimony before the Senate Banking Committee on Tuesday morning, in which he detailed recent economic deterioration and pledged Fed “transparency” reforms, Bernanke gave his audience a surprisingly sanguine appraisal — conditioned on the Obama administration, Congress, and the Fed working together well. “If financial conditions improve,” he added, “the economy will be increasingly supported by fiscal and monetary stimulus, the salutary effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit.”
His presentation comes on the morning of President Obama’s first speech to Congress, to be televised nationally Tuesday night. The president is expected to try to give some specificity to his plans to address the economic meltdown, and reverse the perception that stimulus efforts so far largely have been an ill-conceived patchwork.
In a way perhaps setting the stage for that appearance, Bernanke first described the economic deterioration that has devastated businesses and consumers, while noting the continuing risks that block efforts at recovery, and then offering something of a best-case scenario for improvement if governmental efforts work at the federal level.
He began his remarks by noting the sudden “severe contraction” that began in the 2008 second half, reflected in the steady rise in the unemployment rate to the current 7.6 percent, the loss of equity and housing wealth, tight lending conditions, and cutbacks in capital outlays by firms in reaction to the softer sales outlook and tight credit. “The principal cause of the economic slowdown was the collapse of the global credit boom and the ensuing financial crisis, which has affected asset values, credit conditions, and consumer and business confidence around the world,” he said. And he called the end of housing booms in the U.S. and elsewhere its “immediate trigger.”
After noting Fed and other agency measures taken so far — especially to ease credit — he said that these steps “since September have helped to restore a degree of stability to some financial markets.” Still, he told of how the Fed had “substantially marked down” its forecasts for real gross domestic product for this year, compared to what had been predicted in October.
“This outlook for economic activity is subject to considerable uncertainly, and I believe that, overall, the downside risks probably outweight those on the upside,” Bernanke told the banking committee. “One risk arises from the global nature of the slowdown, which could adversely affect U.S. exports and financial conditions to an even great degree than currently expected. Another risk derives from the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing.”
To interrupt that loop, he said, “it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets.” He noted the Treasury Department’s strategy, announced on Monday, built around four areas: a new capital assistance program to help banks restore high-quality capital levels, a public-private investment fund to allow purchase of legacy assets from financial institutions, expansion of the Fed’s Term Asset-backed Securities Loan Facility, and other measures to prevent unnecessary foreclosures.
As for the Fed’s own commitment to the public interest, a review of its disclosure policies and communications has begun, Bernanke said. And he described two new initiatives stemming from the review: an improvement of public access to information on Fed policies and programs, including through its Web site, and the establishment of a committee to review publications and disclosure policies “relating to the Fed’s balance sheet and lending policies.”
Bernanke told Congress that “the Federal Reserve is committed to using all available tools to stimulate economic activity and to improve financial market functioning.” The reduction of the target for the federal funds rate to close to zero, and programs designed “to increase the flow of credit to key sectors of the economy” reflect that commitment, he added.
“We believe that these actions, combined with the broad range of other fiscal and financial measures being put in place, will contribute to a gradual resumption of economic growth and improvement in labor market conditions in a context of low inflation,” he said.