Fed Reserve chief sees light at end of US recession tunnel

DEMAND IN the US “might be stabilising”, Ben Bernanke said yesterday in guardedly optimistic remarks suggesting the recession could end this year.

The Federal Reserve chairman’s comments came as main money market rates fell to record lows, underscoring recovering confidence among investors and bankers.

The three-month dollar Libor – the interest rate banks charge each other for such loans – yesterday fell below 1 per cent for the first time. Sterling and euro rates were also lower. These rates underlie borrowing rates for households and businesses.

In testimony to Congress, Mr Bernanke highlighted a pick-up in consumer spending, signs of a bottoming-out in housing and improvement in some financial markets. “We continue to expect economic activity to bottom out, then to turn up later this year,” he said. A survey of the US services sector activity published yesterday also suggested the pace of decline was slowing, although it still pointed to mild contraction.

The Fed chairman said the US central bank was focused “like a laser” on the need to ensure it could reduce the extraordinary degree of stimulus at the appropriate moment. However, he said the evidence of overall stabilisation remained “tentative” with better news on the consumer front set against extreme weakness in business investment.

He said recovery was likely to be initially weak. “We are likely to see further sizeable job losses and increased unemployment in the coming months,” he warned.

Nonetheless, Mr Bernanke said he thought unemployment – now 8.5 per cent – would not reach double digits as some economists feared, and would instead peak “somewhere in the nines”. He said consumer spending power would be “boosted by the fiscal stimulus” in the coming months.

However, he said “the weak labour market and the declines in equity and housing wealth” would continue to weigh on spending. Mr Bernanke noted “credit conditions for consumers remain tight”.

The Fed chairman appeared confident the fall in housing activity was nearing an end. The housing market has “shown some signs of bottoming,” he said. With mortgage rates down 1.75 per cent since August, “increased affordability of homes appears to be contributing more broadly to the steadying in the demand for housing”. But he said indicators of business investment “remain extremely weak”. While surveys had “turned a bit more positive”, firms were “reporting net declines in new orders and restrained capital spending plans”. – (Copyright Financial Times Limited 2009)