NEW YORK – Signs point to a moderate recovery in the near future, but Federal Reserve Board Chairman Ben S. Bernanke told Congress this morning, and while he made no mention of monetary policy, he did say inflation was expected to be subdued and housing was still a concern.
“Supported by stimulative monetary and fiscal policies and the concerted efforts of policymakers to stabilize the financial system, a recovery in economic activity appears to have begun in the second half of last year,” Bernanke told a Congressional Joint Economic Committee, according to prepared text of his remarks, which were released by the Fed.
After “working down” excess inventories, firms needed to expand production, he said. “Indeed, the boost from the slower drawdown in inventories accounted for the majority of the sharp rise in real gross domestic product (GDP) in the fourth quarter of last year, during which real GDP increased at an annual rate of 5.6%.”
But, now further economic expansion will be determined by private final demand, which he said, “will be sufficient to promote a moderate economic recovery in coming quarters.”
A gradual pickup in employment, recovery in household wealth, and an increase in credit availability, will spur consumer spending, which has grown slightly.
“To be sure, significant restraints on the pace of the recovery remain, including weakness in both residential and nonresidential construction and the poor fiscal condition of many state and local governments,” Bernanke noted.
The labor market appears to be improving with layoffs slowing and new claims for unemployment insurance on a generally downward trend. “However, if the pace of recovery is moderate, as I expect, a significant amount of time will be required to restore the 8-1/2 million jobs that were lost during the past two years. I am particularly concerned about the fact that, in March, 44% of the unemployed had been without a job for six months or more. Long periods without work erode individuals’ skills and hurt future employment prospects,” Bernanke said.
“On the inflation front, recent data continue to show a subdued rate of increase in consumer prices,” he added, noting, “the moderation in inflation has been broadly based, affecting most categories of goods and services with the principal exception of some globally traded commodities and materials, including crude oil. Long-run inflation expectations appear stable.”
Bernanke noted the Fed “has been working to ensure that our bank supervision does not
inadvertently impede sound lending and thus slow the recovery. Achieving the appropriate balance between necessary prudence and the need to continue making sound loans to creditworthy borrowers is in the interest of banks, borrowers, and the economy as a whole.”
He pointed to Fed policy statements “emphasizing the importance of lending to creditworthy customers, working with troubled borrowers to restructure loans, managing commercial real estate exposures appropriately, and taking a careful but balanced approach to small business lending.”
The U.S. budget deficits are also a concern, Bernanke said. “Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires that policymakers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance. A credible plan for fiscal sustainability could yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence. Timely attention to these issues is important, not only for maintaining credibility, but because budgetary changes are less likely to create hardship or dislocations when the individuals affected are given adequate time to plan and adjust. In other words, addressing the country’s fiscal problems will require difficult choices, but postponing them will only make them more difficult.”
