RISMEDIA, July 23, 2009-(MCT)-During his semiannual report to Congress earlier this week, Federal Reserve Chairman Ben S. Bernanke expressed concerns about rising unemployment and foreclosures in the coming months and also reiterated that the central bank would keep interest rates at “exceptionally low levels for an extended period.”
Offering a more hopeful outlook on the grim picture than many economists, Bernanke projected that the U.S. economy would turn the corner in the second half of this year, with growth gradually recovering next year and accelerating in 2011. But he said consumer spending, which accounts for about 70% of U.S. gross domestic product, was likely to be constrained by the weak labor market, tight credit and declining home prices.
“We have a very long haul here,” Bernanke said, addressing a question from the House Committee on Financial Services. “Unemployment is going to stay up for quite awhile, and it’s not going to feel like a strong economy,” he said, raising the specter of a jobless recovery.
Bernanke said that the jobless rate, which hit 9.5% in June, probably would peak at the end of this year and that overall employment would start growing again at year’s end or early next year. The U.S. economy shed nearly half a million jobs in June, putting the total payroll losses since the recession began in December 2007 at about 6.5 million.
“The combination of unemployment and falling house prices, the double trigger, does create a very high rate of foreclosures,” he said. “Our assessment of the foreclosures is that it’s likely to peak in the second half of 2009, corresponding with the peak in the unemployment rate and, perhaps, be somewhat less in 2010.”
Given the fragile economic conditions, Bernanke reiterated that the key federal funds rate was likely to remain at “exceptionally low levels for an extended period.” The Fed has maintained the rate that banks charge one another for overnight loans near zero since December. In his prepared remarks, Bernanke indicated that, given the economic conditions and low inflation, the key federal funds rate was likely to remain near zero for an extended period. That is the rate that banks charge one another for overnight loans.
At the same time, he sought to reassure Wall Street and the public that the Fed had the ability to withdraw in “a smooth and timely manner” the extraordinary policy measures that it took to boost the economy, so as to avert a buildup of inflation in the future. “We are confident that we have the necessary tools to implement that strategy when appropriate,” he said, noting that some of the emergency measures have already started to unwind. The total credit extended by the Fed to banks and other entities, he said, had fallen below $600 billion from about $1.5 trillion at the end of 2008.
In response to a question about the $787 billion stimulus package, Bernanke told lawmakers that he believed the money had helped to support consumer spending and the labor market. But he said it was too early to assess the overall effectiveness of the package.
(c) 2009, Tribune Co.
Distributed by McClatchy-Tribune Information Services.