Although financial markets have stabilized somewhat, they “remain under considerable stress,” Federal Reserve Board chairman Ben S. Bernanke told Congress yesterday.
Short-term bank funding markets are again under pressure, he said, and lenders are reluctant to make loans to “counterparties, especially leveraged investors, and have increased the amount of collateral they require to back short-term security financing agreements.” Investors, in turn, have cut back their leverage and liquidated holdings, adding downward pressure on security prices.
“The effects of the financial strains on credit cost and availability have become increasingly evident,” Bernanke noted, “with some portions of the system that had previously escaped the worst of the turmoil — such as the markets for municipal bonds and student loans — having been affected.”
The near-term economic outlook is weaker now than the Federal Open Market Committee projected at the end of January, and real gross domestic product growth will be minimal in the first half of the year, with a slight contraction possible.
“We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies; and growth is expected to proceed at or a little above its sustainable pace in 2009, bolstered by a stabilization of housing activity, albeit at low levels, and gradually improving financial conditions,” Bernanke said. “However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside.”
Inflation also remains problematic, he said, but core inflation has “edged down recently” and moderation is expected.
But Bernanke remained optimistic. “Clearly, the U.S. economy is going through a very difficult period. But among the great strengths of our economy is its ability to adapt and to respond to diverse challenges,” he said. “Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year. I remain confident in our economy’s long-term prospects.”
