Bernanke

Bernanke: Economy to turn up in '09

Federal Reserve chairman says recovery will begin later this year, but there will be several more bumps in the road.

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By David Goldman, CNNMoney.com staff writer

Last Updated: May 5, 2009: 10:20 AM ET

 

NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke said Tuesday that the U.S. economy is stabilizing and will begin to rebound later this year, but the recovery will be slow and cautious.

At a hearing of the Joint Economic Committee of Congress, Bernanke said consumer sentiment, the housing market and spending have begun to show signs of life.

But he expects the economy will continue to shed jobs and credit will remain tight for some time. He said the recent frugality trend will continue due to deflated household wealth, and business spending will be slow to bounce back as well.

"We continue to expect economic activity to bottom out, then to turn up later this year," said Bernanke in prepared testimony. "Even after a recovery gets under way ... we expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly."

0:00 /4:47Regulators ask for more power

The Fed chief said he was encouraged by the recent rally in bank stocks, led higher by some positive earnings in the first quarter, but "substantial concerns about the banking industry remain."

Bernanke said his economic forecast hinges on a "gradual repair" of the financial system: If banks and financial conditions relapse, the economic recovery could be even more drawn out.

But Bernanke and some members of the committee believe that the regulator's actions, combined with those of the Treasury Department and the Federal Deposit Insurance Corp., have done much to help make an economic recovery possible.

"The Federal Reserve has taken an extraordinary series of measures to preserve financial stability and to restore the proper functioning of key credit markets," said the committee's chairwoman, Rep. Carolyn Maloney, D-N.Y., in prepared remarks. "How far we have come in restoring normal functioning to the financial system, and what remains to be done are key questions."

Despite trillions of dollars in credit easing and stimulus programs undertaken by the government since last September, Bernanke said he believes inflation will remain subdued for the time being. But Republican members of the panel said they were concerned that the huge increase in the Fed's balance sheet will create an untenable situation by the end of the year.

"Has the pendulum swung too far, Mr. Bernanke? When will the Fed admit the current fiscal costs are simply unsustainable?" asked Rep. Kevin Brady, R-Texas. "The Fed expanded its balance sheet by 127%. What's the Fed's exit strategy?"

Last week, the Fed said that it believes the U.S. economy continues to grow worse, but the pace of decline has slowed and the outlook has improved. At the conclusion of its two-day meeting, the rate-setting Federal Open Markets Committee noted that financial market conditions have improved "modestly," since last month. As a result, it kept its interest rate target in a range between 0% and 0.25%.