Federal Reserve chief Ben Bernanke says the recession-hit US economy could rebound this year but warned of further job losses and vulnerability of the financial system.
“We continue to expect economic activity to bottom out, then to turn up later this year,” he told a key congressional panel.
He said key elements of his forecast were assessments that the housing market, at the epicenter of global financial turmoil, and consumer spending was beginning to stabilise.
Recent data, he said, suggested that the pace of economic contraction might be slowing, including “some tentative signs that final demand, especially demand by households, may be stabilizing.”
Bernanke said that an “important caveat” was that his forecast assumed continuing gradual repair of the financial system still reeling from turmoil.
Financial markets and financial institutions remain “under considerable stress, and cumulative declines in asset prices, tight credit conditions, and high levels of risk aversion continue to weigh on the economy,” he said.
“A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall,” he said ahead of results to be released Thursday from “stress tests” conducted by authorities on 19 top banks.
News reports Tuesday said that 10 of the 19 banks subject to the tests might need to raise more capital and those affected could include banking giants Wells Fargo, Bank of America and Citigroup.
When pressed by a lawmaker, Bernanke refused to disclose the test results but said many US banks needing fresh capital would be able to meet their needs through the market without further government support.
“I have looked at many of the banks and I believe many of them will be able to meet their capital leads without further government capital through either issuance of new capital or converges of exchanges or sale of assets and other measures that would raise capital,” he said.
The stress tests will cap a period of suspense that began when President Barack Obama\’s administration unveiled in February its overhaul of a program to restore stability to the financial system of the world\’s largest economy.
The United States entered into recession in December 2007 following a home mortgage meltdown that triggered a credit crunch and financial turmoil across the globe.
US economic growth contracted a massive 6.1 percent in the first quarter of 2009 after a 6.3 percent slide in the previous quarter.
Bernanke said even after a recovery got underway, the rate of growth of real economic activity was likely to remain below its longer-run potential for a while.
“We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly,” he said.
“In particular, businesses are likely to be cautious about hiring, implying that the unemployment rate could remain high for a time, even after economic growth resumes,” he explained.
The most recent information on the labor market — the number of new and continuing claims for unemployment insurance through late April — suggested that “we are likely to see further sizable job losses and increased unemployment in coming months,” Bernanke said.