Bernanke: Economy could climb out of recession this year

WASHINGTON -- The economy may climb out of recession in 2009, but there are considerable downside risks, and a full recovery is unlikely for a number of years, Federal Reserve Chairman Ben Bernanke said Tuesday.

"If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability — and only if that is the case, in my view — there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery," Bernanke said in testimony to the Senate Banking Committee.

But the outlook for improvement in the economy this year is "subject to considerable uncertainty," he said. "I believe that, overall, the downside risks probably outweigh those on the upside."

And an end to the recession doesn't mean a quick return to economic strength. Fed policymakers believe a "full recovery of the economy from the current recession is likely to take more than two or three years," Bernanke said in his twice-yearly testimony to Congress about the economy.

The Fed chairman said with the economy expected to be sluggish for some time, interest rates, which the U.S. central bank lowered to near zero last year, will likely stay low "for some time."

Bernanke said once financial conditions improve, there are a number of issues working in the economy's favor, including the fiscal stimulus just enacted by Congress, aggressive actions by the Federal Reserve, the steep drop in energy prices, the reduction in inventories and increased availability of credit.

But there are also forces working in the opposite direction.

The "global nature" of the downturn means U.S. exports could continue to be sluggish and financial conditions could be dragged down by stresses abroad. He also warned of an "adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing."

To break such a pattern, Bernanke said it is important that the government continue to act to stabilize financial institutions and markets.