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Source: Reuters -
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US Federal Reserve chairman Ben Bernanke has warned that unless government efforts succeed in restoring financial stability, the nation's recession may not end this year.
Bernanke told lawmakers that the fast-shrinking US economy was at further risk from a mutually reinforcing cycle of weak growth and financial market strain.
"To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilise financial institutions and financial markets," he told the Senate Banking Committee.
"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," he said.
Financial markets largely ignored the testimony, focusing instead on a dire reading on US consumer confidence, which the private sector Conference Board said sank to a record low in February. US stock markets cut early gains, while prices for US government debt rose.
Bernanke provided no details on what further steps US officials might take to shore up the nation's creaky banking system. The ill state of US banks has weighed on US stocks, which hit a 12-year low on Monday.
"What the market wants to learn from Bernanke he may not even know, and if he does know, may not be able to tell them, which is 'What's the state of the bank rescue plan?'" said Cary Leahey, an economist with Decision Economics in New York.
Global slowdown crimping US growth
Delivering the Fed's semiannual report on monetary policy, Bernanke further warned that another risk to the outlook was the global nature of the economic slowdown, which could sap US exports and harm financial conditions to a greater degree than currently expected.
A slump in US exports as world growth chilled last year added to a deep pullback in consumer spending that steepened the downward slide in the US economy.
Bernanke said the Fed - which has dropped rates to nearly zero - would keep borrowing costs exceptionally low for some time and pledged to use "all available tools" to stimulate the economy and heal financial markets.
The Fed chairman made no mention of the prospect the central bank would purchase longer-term US government debt, marking his third consecutive appearance in which he has not mentioned the possibility, which was front-and-center in a statement central bank policy-makers issued in late January.
"The Fed has decided put the Treasuries option on the back burner," concluded Kevin Flanagan, a fixed income strategist at Morgan Stanley in Purchase, New York.
Bernanke noted that an ongoing Fed program to buy mortgage finance agency debt and mortgage-backed securities had helped move mortgage rates lower by nearly one percentage point since it was announced in November.
He also said inflation pressures had receded dramatically as oil and commodity prices had fallen and slack had built up in the economy.
Steps the central bank has taken have helped restore some stability in certain areas of financial markets, the Fed chairman said, citing reduced strains in short-term funding markets, improved commercial paper market conditions and declines in corporate risk spreads.
"Nevertheless, despite these favorable developments, significant stresses persist," Bernanke said. "Notably, most securitisation markets remain shut, other than for conforming mortgages, and some financial institutions remain under pressure."
