Recession easing, financial stability needed: Fed

Tuesday, April 14, 2009 at 9:31 PM Posted by Beijing News


Federal Reserve chief Ben Bernanke said Tuesday that there were initial signs that the prolonged US recession may be easing but warned of the need for financial stability for full recovery.

He said he saw "tentative signs that the sharp decline in economic activity may be slowing," citing data on home sales, home-building and consumer spending, including sales of new motor vehicles.

While a levelling out of economic activity was the first step toward recovery, he said, "To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets.

"We are making progress on that front as well, and the Federal Reserve is committed to working to restore financial stability as a necessary step toward full economic recovery," he said in a speech at Morehouse College in Atlanta, Georgia.

A key concern hanging over markets is the massive amounts of "toxic" assets remaining on the balance sheets of banks reeling from financial turmoil stemming from a home-mortgage meltdown that has slammed the brakes on growth.

Bernanke, who has pushed massive monetary expansion to jolt the economy which has been in recession since December 2007, said he was "fundamentally optimistic" about the US economy, the world's largest.

"Today's economic conditions are difficult, but the foundations of our economy are strong, and we face no problems that cannot be overcome with insight, patience, and persistence," he said.

Even as Bernanke cited initial economic data to underscore easing economic contraction, analysts were taken aback by fresh figures from the Commerce Department Tuesday showing retail sales slumping again in March after rising in January and February.

US retail sales dropped a surprise 1.1 percent in March after the two-month gains amid rising unemployment, worries about job security and problems in accessing credit.

President Barack Obama said Tuesday the United States was seeing the first "glimmers of hope" amid its economic crisis, but warned of more job cuts, foreclosures and pain in the months to come.

Bernanke said "the Fed's toolkit remains potent" in unclogging credit flow to households and businesses even though interest rates were close to zero and could not be reduced further.

But he signaled concern over efforts to restore stability in the housing market, the epicenter of global turmoil.

"Restoring stability to the market for housing and home mortgages has been a particular area of concern," he said, citing steps to mop up mortgage-related securities in the market.

The Fed has moved to buy mortgage-related securities in the open market, approving purchases of more than one trillion dollars this year of such securities guaranteed by the government-controlled mortgage companies, Fannie Mae and Freddie Mac.

"Certainly, the housing market remains depressed, but lower interest rates and house prices are making houses more affordable," he said.

On the prospect of rocketing inflation following the Fed's aggressive actions to stimulate economic recovery, Bernanke said the central bank would be able to roll back its measures when signs of revival accelerate.

"We are thinking carefully about these issues; indeed, they have occupied a significant portion of recent FOMC meetings," he said referring to the Fed's policy-making panel, the Federal Open Market Committee.

Some experts have questioned the Fed's move to flood America's money supply in an effort to boost the flow of credit through the purchase of Treasuries and other means of quantitative easing, raising the specter of rising inflation.





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