Federal Reserve Chairman Ben Bernanke: Economy Recovering Slowly

Unemployment to remain high, interest rates low, says Fed Chief

ByMATTHEW JAFFE
February 24, 2010, 10:34 AM

WASHINGTON, Feb. 24, 2010— -- High unemployment and low interest rates will continue as the country undergoes "a nascent economic recovery" from the worst downturn in generations, Federal Reserve Chairman Ben Bernanke said today in his semi-annual report to Congress.

Despite the progress, growing commercial real estate problems, soaring deficits, and mounting job losses pose a real threat to the future, he said.

Addressing the House Financial Services Committee Wednesday morning in Washington, Bernanke said government efforts to rescue the economy from a more severe crisis have helped arrest the decline and are leading toward recovery. To keep the recovery from stalling, Bernanke said the Fed's key interest rates would remain near historic lows for "an extended period."

As evidence of growth, Bernanke said the country's economy expanded at a 4 percent rate during the second half of last year. Once the government pulls back its rescue efforts, continued economic recovery will depend on the private sector, the Fed chief said.

But there are a slew of factors that could jeopardize economic growth, Bernanke cautioned, including the nation's skyrocketing debt.

"It is very very important for Congress and the administration to come up with some kind of program, some kind of plan, that will credibly show how the United States government is going to bring itself back to a sustainable position," Bernanke said.

"It's not something that's 10 years away because it affects the markets today," he cautioned. "And the longer you wait, the harder it's going to be."

High unemployment and low interest rates will continue as the country undergoes "a nascent economic recovery" from the worst downturn in generations, Federal Reserve Chairman Ben Bernanke said today in his semi-annual report to Congress.

However, growing commercial real estate problems, soaring deficits, and mounting job losses pose a real threat to the future, he said.

Addressing the House Financial Services Committee Wednesday morning in Washington, Bernanke said government efforts to rescue the economy from a more severe crisis have helped arrest the decline and are leading toward recovery. To keep the recovery from stalling, Bernanke said the Fed's key interest rates would remain near historic lows for "an extended period."

As evidence of growth, Bernanke said the country's economy expanded at a 4 percent rate during the second half of last year. Once the government pulls back its rescue efforts, continued economic recovery will depend on the private sector, the Fed chief said.

But there are a slew of factors that could jeopardize economic growth, Bernanke cautioned, including the nation's skyrocketing debt.

"It is very very important for Congress and the administration to come up with some kind of program, some kind of plan, that will credibly show how the United States government is going to bring itself back to a sustainable position," Bernanke said.

"It's not something that's 10 years away because it affects the markets today," he cautioned. "And the longer you wait, the harder it's going to be."

Despite the rising tide of red ink, Bernanke said he did not foresee downgrades in the US credit rating. "Of course, there are real long-term budget problems that need to be addressed," he added.

The Fed chief also warned lawmakers that commercial real estate problems are "the biggest credit issue we still have." Suffering under the weight of soured commercial real estate loans, US banks last year registered their steepest decline in lending in the last 67 years, according to the Federal Deposit Insurance Corporation, with the total outstanding loans plunging by 7.5 percent. One lawmaker, Rep. Luis Gutierrez, D-Ill., called the commercial real estate issues "a coming tsunami."

"It is a serious problem," Bernanke said. "If those banks have their capital depleted or go out of business, that's going to affect the supply of credit, so that affects our economy, so that is a very important problem."

The Fed chief said the central bank was monitoring the situation "very carefully" and making "a concerted effort" to deal with the issue. Bernanke told lawmakers that the country's battered job market appears to be improving.

"Some recent indicators suggest the deterioration in the labor market is abating," he said. "Job losses have slowed considerably." Still, as the Fed chief reminded his listeners, more than 40 percent of unemployed people have now been out of work for over six months. In his forecast for the coming year, Bernanke predicted "a moderate pace of economic recovery with economic growth of roughly 3 to 3.5 percent growth in 2010 and 3.5 to 4.5 in 2011.

The unemployment rate, he said, will "decline only slowly", falling to around 6.5 to 7.5 percent by the end of 2012.

Bernanke said one factor contributing to the millions of job losses during the recession is that increased productivity by American workers enabled employers to shed more jobs than other nations.

"Ironically, one of the reasons that we lost so many jobs is that American firms were incredibly efficient at reducing their costs in the depths of the crisis," he said. "Many other countries were not as effective at cutting costs and what we've found here is we've found enormous increases in productivity, which bodes well for the long run, but obviously in the short run it means there were more job losses than would otherwise have been the case. It's partly for that reason that it's hard to judge how quickly jobs will come back."

During the hearing's most colorful exchange, Rep. Ron Paul, R-Texas, – calling for increased transparency at the central bank – claimed that the Fed had been involved in "shenanigans" such as the Watergate scandal and loans to Saddam Hussein.

Replied Bernanke, "These specific allegations you've made, I think, are absolutely bizarre."

In response to Paul speculating about the Fed possibly bailing out Greece, Bernanke said, "We have no plans whatsoever to be involved in any foreign bailouts of that sort."

Bernanke today also offered a tepid endorsement of the so-called Volcker Rule, President Obama's recent proposal – named after former Fed boss Paul Volcker – to prohibit big commercial banks, whose deposits are insured by the FDIC, from engaging in risky activities such as proprietary trading.

"The Volcker Rule might be appropriate, but you have to be careful," said Bernanke, suggesting that bank supervisors be given the power to decide whether a firm can be permitted to engage in certain activities. Today's hearing before the House panel was the first of two hearings that the Fed chief will have on Capitol Hill this week. On Thursday Bernanke will testify before a Senate committee.

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