Bernanke: Recovery Sluggish, But ComingFederal Reserve chairman Ben Bernanke on Tuesday tried to allay concerns on Capitol Hill re: the ability to pull out of the stimulus mode the government has been in since last fall.
Bernanke testified before the House Financial Services Committee, saying he expects the Fed to keep its bank lending rate at a record low for an extended period, even though "the pace of decline appears to have slowed significantly."
"It is important to assure the public and the markets that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation," he says.
The Fed "has been devoting considerable attention to issues relating to its exit strategy, and we are confident that we have the necessary tools to implement that strategy when appropriate," he told the committee.
Bernanke described his current financial outlook: "Today financial conditions remain stressed, and many households and businesses are finding credit difficult to obtain. Nevertheless, on net, the past few months have seen some notable improvements. For example, interest rate spreads in short-term money markets, such as the interbank market and the commercial paper market, have continued to narrow. The extreme risk aversion of last fall has eased somewhat, and investors are returning to credit markets."
Bernanke sees aside from the improvements, "the rate of job loss remains high, and the unemployment rate has continued its steep rise. Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook."
He observes, "The recovery is expected to be gradual in 2010, with some acceleration in activity in 2011. Although the unemployment rate is projected to peak at the end of this year, the projected declines in 2010 and 2011 would still leave unemployment well above FOMC [Federal Open Market Committee] participants' views of the longer-run sustainable rate. All participants expect that inflation will be somewhat lower this year than in recent years, and most expect it to remain subdued over the next two years."