In testimony before the Congressional Joint Economic Committee Tuesday, Federal Reserve Chairman Ben Bernanke said it is expected that economic activity will bottom out then turn up later this year.
“Key elements of this forecast are our assessments that the housing market is beginning to stabilize and that the sharp inventory liquidation that has been in progress will slow over the next few quarters,” Bernanke said. “Final demand should also be supported by fiscal and monetary stimulus.”
The chairman emphasized that the forecast basis assumes a gradual repair of the financial system; a relapse in financial conditions would be a “drag” on economic activity and could cause recovery to stall, Bernanke said.
The rate of growth for economic activity will be a slow one, according to forecasts, and it is anticipated that the unemployment rate could remain high, even after economic growth resumes.
Inflation will remain low, Bernanke added. “Indeed, given the sizable margin of slack in resource utilization and diminished cost pressures from oil and other commodities, inflation is likely to move down some over the next year relative to its pace in 2008. However, inflation expectations, as measured by various household and business surveys, appear to have remained relatively stable, which should limit further declines in inflation.”
As for financial markets, Bernanke said they remain under considerable stress and cumulative declines in asset prices, tight credit conditions, and high levels of risk aversion continue to weigh on the economy.
“Responding to questions from lawmakers, Mr. Bernanke said Tuesday he foresees ‘significant’ opportunities for banks to raise capital once their stress tests are completed,” reports the Wall Street Journal. “Mr. Bernanke told the Joint Economic Committee of Congress that the best outcome for the 19 banks being assessed by the government would be to be able to raise new capital without seeking additional help from Treasury.”
Bernanke said he believes there will be significant opportunities for capital-raising outside the government’s programs.
“However, Mr. Bernanke added that it is difficult to say whether the majority of new capital will come from the private sector, since it will depend on the market’s perception of the strength of the banking sector. When asked about putting taxpayer money at risk to address the financial crisis, Mr. Bernanke said he doesn’t expect the central bank’s programs to lose any money.”