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Central Bank. U.S. Economy in Severe Contraction
 
[L[Quote]] · 1990 days ago · [L[0 points]] ·
 

24 February 2009

 

Washington — The U.S. economy is in a “severe contraction,” but with a strong mix of government action by the president and Congress, and monetary stimulus from the nation’s central bank, a recovery could begin next year, says Federal Reserve Chairman Ben Bernanke.

 

“If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability — and only if that is the case, in my view — there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery,” Bernanke said.

Bernanke presented his semiannual monetary policy report to the Senate Banking, Housing and Urban Affairs Committee on February 24.

 

“It is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets,” he said in prepared remarks. “The Federal Reserve is committed to using all available tools to stimulate economic activity and to improve financial market functioning.”

The collapse of the global credit boom and the U.S. housing market and the ensuing financial crisis, which some experts believe is the worst since the Great Depression era in the 1930s, plunged the United States into a recession at the end of 2008, he said.

 

“Conditions in housing and mortgage markets have proved a serious drag on the broader economy both directly, through their impact on residential construction and related industries and on household wealth, and indirectly, through the effects of rising mortgage delinquencies on the health of financial institutions,” he said.

To curb the recession, the U.S. central bank reduced its primary interest rate — the federal funds rate — to a historical low of 0 to 0.25 percent in December 2008. The federal funds rate is the interest banks charge each other for overnight loans designed to increase credit for borrowing.

“With the federal funds rate near its floor, the Federal Reserve has taken additional steps to ease credit conditions,” Bernanke said.

 

Meanwhile, Congress passed and President Obama signed into law a $787 billion economic stimulus package that includes increased government spending and tax cuts. Obama was expected to address the state of the American economy before a joint session of Congress on February 24.

The U.S. Treasury is changing a previously enacted $700 billion banking recovery program designed to buy troubled assets held by banks to free up lending. The president also announced the creation of a $75 billion program to curb housing foreclosures.

“The Federal Reserve also established new lending facilities and expanded existing facilities to enhance the flow of credit to businesses and households,” Bernanke said. And the Fed has expanded a program that provides funds to banks to provide credit to customers.

 

The objective, Bernanke said, is to restore a degree of stability to financial markets.

 

UNEMPLOYMENT TO RISE

Bernanke testified that the nation’s unemployment rate, currently at 7.6 percent, which is the highest in 16 years, likely will climb to 9 percent this year. The recession has already cut 3.6 million jobs from the U.S. economy.

 

Bernanke said Federal Reserve policymakers expect the gross domestic product — the sum of all U.S. goods and services produced — to decline 0.5 percent to 1.25 percent through the four quarters of 2009.

 

“These projections reflect an expected significant contraction in the first half of this year combined with an anticipated gradual resumption of growth in the second half,” he said.

 

Given the current situation, Bernanke said it is likely the Federal Reserve will continue to target its federal funds rate close to zero as it continues to establish a number of programs designed to increase the flow of credit to key economic sectors, such as banking and housing markets.