Federal Reserve Chairman Ben Bernanke said on Tuesday that the worst U.S. recession since the Great Depression was probably over, but the recovery would be slow and it would take time to create new jobs.
Even though from a technical perspective the recession is very likely over at this point, it's still going to feel like a very weak economy for some time, Bernanke said at the Brookings Institution, a Washington think tank.
In declaring the recession over, Bernanke sounded a slightly more upbeat tone than in late August when he had said simply that prospects for a return to growth were good.
However, he cautioned that growth next year would probably be sluggish and that unemployment would only fall slowly.
The general view of most forecasters is that that pace of growth in 2010 will be moderate, less than you might expect given the depth of the recession because of ongoing headwinds, Bernanke said, citing tight credit conditions and other economic restraints.
He spoke on the one-year anniversary of the collapse of Lehman Brothers investment bank, an event that sparked a global financial panic, and a week before Fed officials meet to review their policy options.
The Fed -- the U.S. central bank -- slashed benchmark interest rates to near zero in December and has been buying mortgage-related securities and longer-term U.S. Treasury debt to give the economy a lift.
Bernanke, in a nod to recent relatively upbeat economic signals, said it was possible the recovery could be stronger than expected, but cautioned that it could also be weaker.
There are risks on both sides of that forecast, he said. But if we do in fact see moderate growth, but not growth much more than the underlying potential growth rate, then unfortunately, unemployment will be slow to come down.
ECONOMIC PULSE QUICKENS
Bernanke's comments implicitly acknowledged the possibility of a stronger-than-expected V-shaped U.S. recovery. The latest Blue Chip survey of economists predicts that growth will expand by a brisk 3 percent annual rate in the third quarter.
Economists generally estimate U.S. trend potential growth to be around 2.5 percent. Growth above that level would be needed to bring down the unemployment rate, which hit a 26-year high of 9.7 percent last month.
After its last meeting on August 11-12, the Fed said the substantial slack in the economy would likely keep inflation subdued for some time, adding that exceptionally low interest rates would likely be needed for an extended period.
Fed policymakers meet next Tuesday and Wednesday and are expected to opt to keep stimulating the economy via ultra-low interest rates and massive asset purchases.
With the benchmark interbank lending rate virtually at zero, the Fed has focused on driving down other borrowing costs by buying mortgage-related debt and U.S. government bonds.
Richmond Fed President Jeffrey Lacker, one of the most hawkish or anti-inflation Fed officials, said on Monday that the Fed must consider if it wants to continue adding stimulus to the economy with its planned purchases of mortgage-related debt now that a recovery seems on track.
But other officials have signaled that they favor carrying through with the program, which envisions purchasing up to $1.45 trillion in mortgage-backed securities and debt issued by mortgage agencies.
Some financial market participants are worried the Fed will not be able to pull back its monetary stimulus in time to avert a pickup inflation.
San Francisco Fed President Janet Yellen dismissed those fears on Monday, saying the more significant threat to price stability over the next several years stems from the disinflationary forces unleashed by the enormous slack in the economy.
Asked about the Obama administration's plan for a sweeping overhaul of U.S. financial regulation, Bernanke said he was optimistic it would be concluded, but acknowledged that U.S. lawmakers have so far been more focused on health-care reform.
I feel quite confident that a comprehensive reform will be forthcoming. This has just been too big a calamity and too serious a problem, and clearly regulatory problems were part of it, he said.