Published May 6, 2009

BERNANKE ON US ECONOMY
Another shock will undercut recovery forecast

He warns that a relapse in financial conditions would be a significant drag

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(WASHINGTON) Federal Reserve chairman Ben S Bernanke warned that another shock to the financial system would undercut the central bank's forecast that the US recession will give way this year to a slow recovery.

'A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall,' Mr Bernanke said yesterday in testimony to the congressional Joint Economic Committee. He highlighted that economic contraction may be slowing and that the housing market has 'shown some signs of bottoming' after a three-year slump.

The Fed chief gave no indication that the Fed intends to retreat from its unprecedented policy of keeping the main interest rate near zero and boosting credit through emergency-loan programmes and asset purchases.

His remarks echo last week's Fed statement that, while the outlook has 'improved modestly' since March, the economy may 'remain weak for a time'.

Mr Bernanke also said that the Fed will soon provide on its website more information on its lending programmes. That includes the number of borrowers, concentration of credit among borrowers, ratings of collateral and some details on contracts with private firms. The central bank will 'continue to expand the range of information' it publishes, he said.



The chairman spoke as a private survey reinforced evidence the recession is easing. The Institute for Supply Management said its index of non-manufacturing businesses, which make up almost 90 per cent of the economy, rose to 43.7, the highest level since October. Readings below 50 signal contraction.

'We continue to expect economic activity to bottom out, then to turn up later this year,' Mr Bernanke said yesterday. 'Key elements of this forecast are our assessments that the housing market is beginning to stabilise and that the sharp inventory liquidation that has been in progress will slow over the next few quarters.'

Mr Bernanke, who spoke two days before the planned release by the Fed and other US regulators of the results from stress tests on the country's 19 largest banks, gave no hint of the results. He said in prepared remarks in Washington that banks 'will be required to develop comprehensive capital plans' and that funds from the government 'will be available as needed'.

'Readings from the credit default swap market and other indicators show that substantial concerns about the banking industry remain,' Mr Bernanke said.

Economic figures in the past two weeks have shown smaller declines in house prices and stabilisation in sales, a jump in consumer confidence and the smallest contraction in manufacturing in seven months.

Still, economists anticipate the job market will keep deteriorating after the sharpest contraction in gross domestic product in half a century.

Employers probably eliminated 610,000 jobs last month, with the unemployment rate rising to 8.9 per cent, based on the median estimates in Bloomberg News surveys. The Labor Department's report is scheduled for May 8. 'The most recent information on the labour market - the number of new and continuing claims for unemployment insurance through late April - suggests that we are likely to see further sizeable job losses and increased unemployment in coming months,' Mr Bernanke said yesterday.

The housing market is showing signs of improvement after the Fed's purchases of mortgage securities helped drive down home-loan rates to the lowest level in decades.

Mr Bernanke and his colleagues moved in March to double purchases of housing debt to US$1.45 trillion, and also started buying US$300 billion of long-term Treasuries. -- Bloomberg