US Fed chief says tough times will yield recovery

01 December 2008 23:06  [Source: ICIS news]

WASHINGTON (ICIS news)--US Federal Reserve Board Chairman Ben Bernanke said on Monday that the US and global economies will remain under considerable stress for some time but he is confident of a recovery.

 

He also indicated that the Fed - the US central bank - is prepared to further shave its already low interest rate and will take other measures to help ensure a recovery.

 

Speaking to a business group in Texas as US markets fell sharply on news of continuing declines in manufacturing and a national recession was officially declared, Bernanke said that “despite the efforts of the Federal Reserve and other policymakers, the US economy remains under considerable stress”.

 

He cited recent and accelerating US job losses, the continuing housing market crisis and further sharp declines in consumer spending - the underlying engine of the nation’s economy.

 

“The likely duration of the financial turmoil is difficult to judge, and thus the uncertainty surrounding the economic outlook is unusually large,” Bernanke said.

 

In addition, “even if the functioning of financial markets continues to improve, economic conditions will probably remain weak for a time”, he added.

 

“In particular, household spending likely will continue to be depressed by the declines to date in household wealth, cumulating job losses, weak consumer confidence and a lack of credit availability,” he said.

 

While surging economies in developing nations in 2007 and the first part of this year had kept US export business strong - which in part offset domestic business woes - the global spread of economic malaise will hurt export trade, he said.

 

“Exports are not likely to be as great a source of strength for US economic activity in coming quarters as they had been earlier this year,” Bernanke warned.

 

However, the Fed chairman said there are some bright spots and the likelihood of a gradual and all but inevitable economic turnaround.

 

“Although the near-term outlook for the economy is weak, a number of factors are likely over time to promote the return of solid gains in economic activity and employment,” Bernanke said.  He cited the sharp declines in prices for crude oil and other commodities, which together have eased what had been a major burden on household purchasing power.

 

He hinted broadly that the Fed will lower its key federal funds rate - now at 1% - when the central bank’s rate-setting committee meets on 15-16 December. 

 

The lowering of the federal funds rate, separate Fed moves to increase monetary liquidity, expected fiscal stimulus action by Congress and “the eventual stabilisation in housing markets and the underlying strengths and recuperative powers of our economy” will bring a recovery, he said.

 

“I believe that the policy responses taken here and by our international partners, together with the underlying vitality and resilience of the American economy, will help to restore confidence to our financial system and place our economy back on the path to vigorous growth,” he said.

 

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