By Calvin Palmer
The chairman of the Federal Reserve, Ben S. Bernanke warned today the economic downturn could get even worse than recent forecasts.
Bernanke told the Senate Banking Committee that the Federal Reserve was doing everything it could to unlock credit markets and ease the financial crisis but it could take until 2010 before the actions of the government gain traction.
“If actions taken by the administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability – and only if that is the case, in my view — there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery,” Mr. Bernanke said.
Two economic barometers today underscored the economy’s downward trajectory.
House prices in the United States plunged at the fastest pace on record in December, according to a closely watched measure of the housing market, signaling that housing is likely to continue declining.
Single-family home values in 20 major metropolitan areas fell 18.5 percent in December compared with a year earlier, according to a data released by Standard & Poor’s Case-Shiller home price index. Housing prices dropped 2.5 percent from November to December.
Nationwide, housing prices in the last three months of 2008 sank to their lowest levels since the third quarter of 2003.
The private Conference Board’s index of consumer confidence dropped to a new low of 25 in February from 37.4 a month earlier as people worried about losing their jobs, earning less and worse prospects over the next six months.
In the first leg of Mr. Bernanke’s bi-annual report to both houses of Congress on the state of the economy and the Fed’s actions, he painted a dire picture of the markets going forward, but assured the committee that government agencies were taking all necessary actions to thaw credit markets.
“The measures taken by the Federal Reserve, other U.S. government entities, and foreign governments since September have helped to restore a degree of stability to some financial markets,” Mr. Bernanke said in testimony. “Nevertheless, despite these favorable developments, significant stresses persist in many markets.”
In particular, he said, most securitization markets “remain shut.”
As required by law, Mr. Bernanke addressed both halves of the Fed’s dual mandate: stable prices and maximum employment. The former part of the mission has largely been met, with prices more or less unchanged from their level a year ago, and inflation is expected to glide under 1 percent during 2009.
But labor market conditions continue to deteriorate. Citing projections by the Fed’s Open Market Committee in January, he said the unemployment rate, which hit 7.6 percent in January, would probably reach 8.5 to 8.75 percent in the fourth quarter. The country’s gross domestic product is projected to decline 0.5 to 1.25 percent this year, he said, and foreclosure rates remain high.
He added, “This outlook for economic activity is subject to considerable uncertainty, and I believe that, over all, the downside risks probably outweigh those on the upside.”
Bernanke testified that the international nature of the slowdown, added to a “so-called adverse feedback loop” — the idea that economic and financial conditions become mutually reinforcing — threaten to delay recovery.
He urged support for the significant — and in many cases, unpopular — fiscal and monetary interventions the government has made into the economy thus far.
[Based on a report by The New York Times.]
