Bernanke: recovery hinges on financial turnaround

March 3, 2009 12:00:00 AM PST
Federal Reserve Chairman Ben Bernanke told Congress Tuesday that any hope for an economic recovery will hinge on the government's ability to prop up shaky financial markets. The effectiveness of a string of radical actions taken by the Fed, the Treasury Department and other agencies to stabilize markets "will be critical determinants of the timing and strength of the recovery," Bernanke said in testimony prepared for the Senate Budget Committee.

President Barack Obama's recently enacted $787 billion stimulus package of increased federal spending and tax cuts should help revive moribund consumer demand, boost factory production over the next two years and "mitigate the overall loss of employment and income that would otherwise occur," Bernanke said.

However, the Fed chief warned that the timing and magnitude of the impact of the stimulus package is subject to "considerable uncertainty, reflecting both the state of economic knowledge and the unusual economic circumstances that we face."

The recession, now in its second year, is inflicting more damage to the economy daily as layoffs mount and companies cut production.

The economy contracted at a staggering 6.2 percent in the final three months of 2008, the worst showing in a quarter-century, and the Fed has said it will probably shrink during the first six months of this year. Recent economic barometers "show little sign of improvement," Bernanke said.

The nation's unemployment rate in January jumped to 7.6 percent, the highest in more than 16 years. And the number of newly laid-off people signing up for unemployment benefits has risen since mid-January, "suggesting that labor market conditions may have worsened further in recent weeks," Bernanke said. The government will release February unemployment data on Friday.

With jobs vanishing, nest eggs cracking and home values tanking, consumers have reined in their spending. That has forced companies to lay off workers, trim production and cut back in other ways. It's a vicious circle of negative forces that feed on each other, deepening the recession.

In back-to-back appearances on Capitol Hill last week, Bernanke planted a seed of hope that the recession could end this year if the government was successful in turning around wobbly financial markets. But the Fed chief didn't repeat that remark in Tuesday's testimony.

Bernanke said the government has made some progress on the financial front since last fall, but he told lawmakers that more needs to be done.

The Obama administration has revamped a $700 billion financial bailout program aimed at strengthening banks, but has said additional money could be needed.

(Copyright 2009 by The Associated Press. All Rights Reserved.)

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