U.S. Federal Reserve Chairman Ben Bernanke warned on Tuesday that unless government efforts succeed in restoring financial stability, the nation's recession may not end this year.
Bernanke told lawmakers that the sharply shrinking economy was at further risk from mutually reinforcing weakening growth and financial market strain.
To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets, he said in testimony prepared for delivery to the Senate Banking Committee.
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, he said.
Bernanke, delivering the Fed's semiannual report on monetary policy, further warned that another risk to his outlook was the global nature of the economic slowdown, which could sap U.S. exports and harm financial conditions to a greater degree than currently expected.
A slump in U.S. exports as world growth chilled last year added to a deep pullback in consumer spending that steepened the country's economic downturn.
Bernanke said the Fed -- which has dropped rates to nearly zero -- would keep borrowing costs exceptionally low for some time and pledged to use all available tools to stimulate the economy and heal financial markets.
The Fed chairman made no mention of the possibility the central bank would purchase longer-term U.S. government debt in his prepared remarks.
He noted that an ongoing Fed program to buy mortgage finance agency debt and mortgage-backed securities had helped move mortgage rates lower by nearly one percent.
Bernanke also said inflation pressures had receded dramatically as oil and commodity prices had fallen and slack had built up in the economy.
Fed measures have helped restore some stability in areas of financial markets, the Fed chairman said, citing reduced strains in short-term funding markets, improved commercial paper market conditions, and declines in corporate risk spreads.
Nevertheless, despite these favorable developments, significant stresses persist in many markets, he said. Notably, most securitization markets remain shut, other than for conforming mortgages, and some financial institutions remain under pressure.
(Editing by Tim Ahmann)