Federal Reserve Chairman Ben Bernanke told Congress on Tuesday the three-year US housing bust may be near a bottom and that he expected the recession to end this year barring a relapse of the financial crisis. Bernanke sounded more confident than he had in recent weeks that the pieces were in place for an economic recovery, although he acknowledged that growth would remain subdued and unemployment high after the recovery begins.
He also said "stress tests" to assess the capital needs of the 19 largest US banks will provide an accurate reflection of the firms' financial positions, and he expected those which need a bigger buffer to raise the money from private sources. "We continue to expect economic activity to bottom out, then to turn up later this year," Bernanke told the congressional Joint Economic Committee. However, he added that even after the recovery begins, "the rate of growth of real economic activity is likely to remain below its longer-run potential for a while."
That will leave slack in the economy, keeping inflation low, which in turn suggests that the central bank will keep interest rates low for some time. The Fed - the US central bank - dropped benchmark overnight interest rates to near zero in December. After a two-day meeting last week, it repeated that it would likely hold borrowing costs at an unusually low level for "an extended period."
Stephen Stanley, an economist at RBS Securities in Greenwich, Connecticut, said Bernanke's comments were "undoubtedly significantly more upbeat than his last congressional appearance in February." Despite the more upbeat economic view, US stock markets slipped, giving back some of the gains racked up on Monday, while prices for government debt rose modestly.
US regulators were expected to brief banks on Tuesday on the findings of the stress tests, which aimed to determine whether the firms have enough capital to withstand a deeper downturn. Regulators will announce results on Thursday. Bernanke said estimates that banks may need hundreds of billions of dollars in additional capital overstated the "call" on government resources, pointing out that the Obama administration has said it does not expect to seek more bailout money from Congress.
"I've looked at many of the banks and I believe that many of them will be able to meet their capital needs without further government capital through either issuance of new capital, or through conversions and exchanges, or through sale of assets and other measures that would raise capital," he said.
He also said the Fed would soon release more details on the various lending programs it has launched to try to ease the credit crisis, including information on the number of borrowers and the collateral accepted. While he stopped short of agreeing to name borrowers, as some lawmakers have requested, he acknowledged that the Fed had a responsibility to keep Congress and the public informed about its lending programs and balance sheet.
That has become a contentious issue as the central bank has extended massive amounts of loans to banks as well as other firms that have not traditionally turned to the Fed in its role of lender of last resort. "I want to commend you for establishing greater transparency at the Fed," Representative Carolyn Maloney, chairman of the Joint Economic Committee, said in a statement.
"To be sure, there are fewer 'secrets of the temple' today, but I know you will appreciate that we must continue to work to strike a better balance between institutional interests and the public's right to know how their money is being spent," the New York Democrat said.
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