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Bernanke Says US Economy Slowly Improving, Challenges Remain


Federal Reserve Bank Chairman Ben Bernanke says the U.S. recession should begin to end later this year, and the economy is in a slow recovery, although extraordinary challenges remain and there are serious risks from deficit spending.

Testifying before the House Budget Committee, the Federal Reserve chairman said he is quite sure that steps taken by the U.S. government since last year prevented a much wider global meltdown. "Last fall we very likely would have had a serious and perhaps global financial meltdown with extraordinarily adverse implications for the U.S. and global economies. I think having averted that, that we now seem to be in a process of slow and gradual repair both of the financial system and of the economy, is a major accomplishment," he said.

Steps included the $700 billion financial rescue Congress approved last year, the $787 billion economic stimulus package earlier this year, and other measures to address weakness in the banking industry and place tighter controls on the financial system.

Bernanke said data suggests that the pace of the country's economic contraction may be slowing. While businesses remain cautious and continue to reduce employees and capital investments, they are also reducing excess inventory to align with realistic sales prospects. And that he says, could lead to increased production.

In the housing market, which has been a key drag on the economy, Bernanke says after a long period of decline there are signs of a bottoming out.

But while he predicts overall economic activity will begin to turn upward by the end of the year, Bernanke said a weak labor market, declines in household equity and wealth, and tight credit conditions could slow recovery.

With some six million jobs lost so far, he added, unemployment is likely to remain high for some time, with recent information suggesting "sizable job losses and further increases in unemployment" likely in coming months.

Bernanke voiced particular concern about huge federal deficits, and the amount of debt held by the public measured against Gross Domestic Product (GDP), which he noted is projected to increase to about 70 percent in 2011, the highest since the early 1950's.

"Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance," he said.

Republicans, who have used the deficit and debt issues as key points of criticism against President Obama and the Democrats, shared this concern.

Democrat John Spratt chairs the House Budget Committee, and Paul Ryan is its ranking Republican:

SPRATT: "What we do to make the economy better is likely to make the deficit worse. Yet, at the same time we cannot add infinitely to the national debt without facing the consequences in global credit marks or on our future capacity to borrow."

RYAN: "The treasury is issuing record amounts of debt, over $2 trillion this year alone to support recording government spending and record deficits. Meanwhile, the Federal Reserve has injected an enormous amount of monetary stimulus into the economy and has even started purchasing longer-term treasury bonds in an attempt to lower borrowing costs and further ease financial conditions. This can be a dangerous policy mix - the Treasury is using debt, and the central bank is buying it."

The Obama administration has estimated that the budget deficit this fiscal year will total $1.8 trillion. That number is projected to decline to $900 billion in 2011.

In his testimony, Federal Reserve Chairman Bernanke offered what he called an important caveat to projections about recovery. He said they assume a continuing gradual repair of the financial system, and an improvement of credit conditions.

Any financial sector relapse [deterioration], he added, could create a significant drag on economic activity and cause "the incipient recovery" to stall.

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