Bernanke Views Economic Recovery With Cautious Optimism

Published April 14, 2009

| AP

Federal Reserve Chairman Ben Bernanke said Tuesday there's been "tentative signs" that the recession may be easing. But he also warned that any hope for a lasting recovery hinges on the government's success in stabilizing shaky financial markets and getting credit to flow more freely again.

Specifically, the Fed chief mentioned improvements in recent data on home and auto sales, home building and consumer spending as flickering signs of encouragement.

"Recently we have seen tentative signs that the sharp decline in economic activity may be slowing," Bernanke said in remarks prepared for students and faculty at Morehouse College in Atlanta.

"A leveling out of economic activity is the first step toward recovery. To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets," he said.

But the Fed is "making progress on that front as well," Bernanke said, and will keep working to ease financial and credit stresses so those markets operate normally.

To revive the economy, the Fed has cut a key bank lending rate to a record low of near zero and has rolled out a number of radical programs to spur lending to Americans, a key ingredient to turning around the economy.

On that front, the Fed recently plowed $1.2 trillion into the economy in an attempt to reduce interest rates for mortgages and other loans. The Fed, meanwhile, also is considering expanding a program to jump-start consumer lending, Bernanke said.

Many analysts believe the economy will continue to shrink in the April-June quarter but not nearly as much as it had been -- perhaps at a rate of 2 to 2.5 percent.

The economy shrank at a 6.3 percent rate in the final three months of 2008, the worst showing in a quarter-century. Some economists say it fared about as poorly in the first three months of this year, while others expect a 4 to 5 percent rate of decline. The government releases its initial estimate for first-quarter economic activity at the end of April.

President Obama is counting on the $787 billion stimulus of tax cuts and increased government spending to help bolster economic activity. The administration also has put forward plans to prop up troubled banks and to reduce home foreclosures.

The government is battling a three-headed monster: housing, credit and financial crises, which are the worst since the 1930s.

"The current crisis has been one of the most difficult financial and economic episodes in modern history," Bernanke said.

Even as the Fed chief mentioned improvements in some recent economic data, a government report released Tuesday showed the economy remains in a fragile state. Retail sales dipped 1.1 percent in March, a much weaker showing than analysts expected.

All the Fed's aggressive actions to fight the crisis also will help fend off any risk of a widespread and prolonged decline in prices, known as deflation. Bernanke didn't use the "d" word, but said that because of the weakness in economic conditions in the U.S. and worldwide, inflation has been low and will "remain quite low for some time."

Wholesale prices fell 1.2 percent in March as the cost of gasoline, other energy products and food plunged, the government reported Tuesday. Excluding volatile food and energy prices, the Producer Price Index was unchanged, below analysts' forecasts of a 0.1 percent rise.

Because the Fed's policies can help thwart a destabilizing drop in prices, they are "not at all inconsistent" with the central bank's goal of achieving stable prices over time, Bernanke said.

Some critics worry that the Fed's policies could spur inflation over the long run if key interest rates aren't quickly boosted and special lending programs aren't rapidly dismantled once the economy shows strong signs of turning around.

Bernanke acknowledged this will be a challenge and require a delicate balancing act. But he was optimistic the Fed is "well equipped to make those judgments appropriately."

Meanwhile, the government's bailout of giant insurer American International Group Inc., to the tune of more than $180 billion, underscores the urgent need for stronger regulations and new powers to minimize the damage from the collapse of a huge nonbank financial company, the Fed chief said.

"In my view, preventing the failure of AIG was the best of the very bad options available, but it nevertheless involved major costs, including financial risks to the taxpayer," Bernanke said.

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