Fragile recovery ahead

Bernanke expects gradual recovery

Reuters

HOPEFULL: Federal Reserve Chairman Ben Bernanke said the three-year US housing bust may be near a bottom.

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Federal Reserve Chairman Ben Bernanke said the three-year US housing bust may be near a bottom and the recession should end this year, as long as there is no relapse of the credit squeeze that has strangled the economy.

In March, Bernanke had pointed to "green shoots" of economic recovery, but in testimony to Congress on Tuesday he was more explicit in saying the pieces were in place for a rebound. Still, he acknowledged that growth would remain subdued and unemployment high even after the recession ends.

He also said "stress tests" to assess the capital needs of the 19 largest US banks will provide an accurate reflection of the firms' financial positions, and he expected those which need a bigger buffer to raise the money from private sources.

"We continue to expect economic activity to bottom out, then to turn up later this year," Bernanke told the congressional Joint Economic Committee.

"An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall."

US stock markets have rallied in recent weeks, with the Standard & Poor's 500 index up 35 percent from an early March low, on hopeful signs that consumer spending was stabilizing and the decline in the housing market was abating. A somewhat stronger than expected reading on the US services sector on Tuesday bolstered that view.

Senator John Ensign said Bernanke told Republican lawmakers that the US economy could grow 2 percent next year and 4 percent in 2011. That was slightly less optimistic than a Fed forecast released in February.

Bernanke said that even when recovery takes hold, it is likely to be tepid and unemployment may not peak until 2010, although it would likely not climb into double digits.

Excess economic slack should keep inflation low, he said, suggesting the Fed – the US central bank – will keep interest rates low for some time as well.

The Fed dropped benchmark overnight interest rates to near zero in December. After a two-day meeting last week, it repeated that it would likely hold borrowing costs at an unusually low level for "an extended period."

Stephen Stanley, an economist at RBS Securities in Greenwich, Connecticut, said Bernanke's comments were "undoubtedly significantly more upbeat than his last congressional appearance in February."

Economists think the United States is further along the road to economic recovery than Europe, thanks in part to the Fed's aggressive response. The International Monetary Fund last month said Europe's recession will drag into 2010.

Despite Bernanke's brighter economic view, US stock markets slipped on Tuesday, giving back some of the gains racked up a day earlier, while prices for government debt were slightly higher.

BAILOUT MONEY

US regulators were expected to brief banks on Tuesday on the findings of their bank stress tests, which aimed to determine whether the firms have enough capital to withstand a deeper downturn. They will announce results on Thursday.

Bernanke said estimates that banks may need hundreds of billions of dollars in additional capital overstated the "call" on government resources, pointing out that the Obama administration has said it does not expect to seek more bailout money from Congress.

"I've looked at many of the banks and I believe that many of them will be able to meet their capital needs without further government capital through either issuance of new capital, or through conversions and exchanges, or through sale of assets and other measures that would raise capital," he said.

Bernanke also said the Fed would soon release more details on the various lending programmes it has launched to try to ease the credit crisis, including information on the number of borrowers and the collateral accepted.

While he stopped short of agreeing to name borrowers, as some lawmakers have requested, he acknowledged that the Fed had a responsibility to keep Congress and the public informed about its lending programmes and balance sheet.

That has become a contentious issue as the central bank has extended massive amounts of loans to banks as well as other firms that have not traditionally turned to the Fed in its role of lender of last resort.

"I want to commend you for establishing greater transparency at the Fed," Representative Carolyn Maloney, chairman of the Joint Economic Committee, said in a statement.

"To be sure, there are fewer 'secrets of the temple' today, but I know you will appreciate that we must continue to work to strike a better balance between institutional interests and the public's right to know how their money is being spent," the New York Democrat said.

- Reuters