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US economy to turn around in 2009: Fed chief

US economy to turn around in 2009: Fed chief
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First Published: Wed, May 06 2009. 12 46 AM IST
Updated: Wed, May 06 2009. 12 46 AM IST
Washington: Federal Reserve chairman Ben Bernanke has said that the recession-hit US economy could rebound this year but warned of more ‘sizable’ job losses and a still-fragile financial system.
“We continue to expect economic activity to bottom out, then to turn up later this year,” he said.
He said that the key elements of his forecast were assessments that the housing market, at the epicenter of global financial turmoil, and consumer spending was beginning to stabilize.
He said: “The recent data suggested that the pace of economic contraction might be slowing, including some tentative signs that final demand, especially demand by households, may be stabilizing.”
Despite significant progress seen in financial markets in recent weeks, Bernanke cautioned that financial institutions remained ‘under considerable stress’.
He cited declines in asset prices, tight credit conditions and high levels of risk aversion, saying they continued to weigh on the economy.
“A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall,” he warned ahead of results to be released Thursday from ‘stress tests’ conducted by authorities on 19 top banks.
News reports said that 10 of the 19 banks subject to the tests might need to raise more capital and those affected could include banking giants Wells Fargo, Bank of America and Citigroup.
When pressed by a lawmaker, Bernanke refused to disclose the test results but said that many US banks needing fresh capital would be able to meet their needs through the market without further government support.
The stress tests will cap a period of suspense that began when President Barack Obama’s administration unveiled in February its overhaul of a program to restore stability to the financial system of the world’s largest economy.
US entered into recession in December 2007 following a home mortgage meltdown that triggered a credit crunch and financial turmoil across the globe.
US economic growth contracted a massive 6.1% in the first quarter of 2009 after a 6.3% slide in the previous quarter but emerging government and private data clearly showed that the recession is easing.
Bernanke said that the decline in foreign economic activity might also be moderating, with investor sentiment and the functioning of financial markets abroad having improved somewhat.
Analysts noted that Bernanke devoted a considerable portion of his testimony to conditions in financial markets.
“Despite the notable progress in recent weeks in the financial markets, the Fed remains extremely concerned about tight credit conditions, and the persistence of concerns about the stability of the banking industry,” said Brian Bethune of IHS Global Insight.
Bethune said that by implementing the stress test program to establish significant capital buffers for US banks. “The Fed is hoping to substantially mitigate one of the major downside risks to the outlook,” he said.
Bernanke cautioned that even after a recovery got underway, the rate of growth of real economic activity was likely to remain below its longer-run potential for a while.
“We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly,” he said.
“In particular, businesses are likely to be cautious about hiring, implying that the unemployment rate could remain high for a time, even after economic growth resumes,” he explained.
“The most recent information on the labor market — the number of new and continuing claims for unemployment insurance through late April — suggested that we are likely to see further sizable job losses and increased unemployment in coming months,” Bernanke said.
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First Published: Wed, May 06 2009. 12 46 AM IST