Fed Chairman Ben Bernanke began his testimony before the Committee on the Budget in the US House of Representative acknowledging the economy has contracted sharply since last fall. Bernanke conceded that companies have shed close to 6 million jobs in this downturn, and the most recent information on the labor market suggests “sizable job losses and further increases in unemployment” are likely over the next few months.
Businesses remain very cautious, he said, and continue to reduce their workforces and capital investments. But he is also seeing reasons for optimism.
Bernanke said the recent data suggest that the pace of economic contraction may be slowing, as consumer confidence has improved and consumer spending, which fell sharply in the second half of 2008, has been roughly flat since the beginning of the year.
The Fed chief commented that activity in the housing market is showing signs of bottoming, while businesses continue to shed unwanted inventories that had accumulated during last year’s steep drop in sales.
Financial market conditions
Bernanke commented that conditions in the credit markets have improved, as he credited actions taken by the Fed and other agencies. But he also said that in recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen and appear to reflect concerns about large federal deficits. He also blamed greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings.
Turning to fiscal matters, the Fed chairman said that higher spending and lower revenues will increase the ratio of federal debt held by the public to nominal GDP from about 40 percent before the onset of the financial crisis to about 70 percent in 2011.
Bernanke said these developments would leave the debt-to-GDP ratio at its “highest level since the early 1950s, the years following the massive debt buildup during World War II.”
He ended his testimony, noting that “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.” Clearly, the Fed and the current administration face major challenges. Choices made by Bernanke in the wake of the demise of Lehman Brothers last year helped to divert a financial catastrophe but the road ahead is not likely to be easy.
Charles Sherry
Tomorrow's Economy Today
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