RTTNews - Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday that the U.S. economy is showing signs of stabilization and that the stimulus authorities have pumped into the global economy probably avoided a collapse of the financial system last year.
Beginning his regular semi-annual update to Congress, the country's top central banker also warned that the economy is still in a fragile state, with unemployment high and consumer spending shaky.
He noted that the Fed will likely keep interest rates low for an extended period.
Still, Bernanke told members of the House Financial Services Committee that the Fed is prepared to remove its stimulus when the time is appropriate in order to avoid a spike in inflation.
Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system, Bernanke said, according to prepared remarks.
Bernanke said that the economy is showing signs of stabilization, noting better conditions in financial markets and stable consumer spending.
The pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization, the Fed chairman observed.
However, the Fed chief warned that job losses and tight credit will put a damper on consumer spending. Bernanke noted the possibility that the recent stabilization in household spending will prove transient, which would be an important downside risk to his outlook.
The chairman said a gradual recovery is expected in 2010, with some acceleration in economic growth the following year.
The unemployment rate will likely peak at the end of this year, Bernanke said, though it will remain high in 2010 and 2011.
On inflation, Bernanke predicted that inflation will likely remain subdued over the next two years.
While he generally stressed the need to keep taking steps to prop up the economy, Bernanke assured lawmakers that the Fed will be able to take away its stimulus when such a move becomes necessary.
Many experts have worried that the massive stimulus that the Fed has pumped into the economy will lead to a significant jump in inflation if kept in place too long.
The FOMC 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, Bernanke assured lawmakers.
The Fed chief noted that many of the measures the central bank has put in place to fight the recession will be removed automatically as the economy recovers.
Most of our extraordinary liquidity facilities are priced at a premium over normal interest rate spreads, Bernanke explained.
On the issue of regulatory reform, Bernanke said any changes should focus on the stability of the financial system as a whole and should include stronger capital and liquidity standards for financial firms.
He also advocated extended supervisory oversight, consumer protections for financial dealings, and what he termed an enhanced bankruptcy or resolution regime.
Bernanke also warned against giving the authority to audit the Fed to other government organizations, arguing that this could jeopardize the central bank's independence.
He said that if the Government Accountability Office had the power to audit the Fed, as some have suggested, financial markets would likely perceive it as a weakening of the central bank's independence and a threat to its ability to fight inflation as it sees fit.
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