YOU ARE HERE: LAT HomeCollections

Bernanke: Interest rates will stay very low for a 'very long haul'

The Federal Reserve chairman tells Congress the economy should turn the corner in the second half of 2009, but 'it's not going to feel like a strong economy.'

July 22, 2009|Don Lee

WASHINGTON — Federal Reserve Chairman Ben S. Bernanke, offering a more hopeful outlook on the grim jobs picture than many economists, projected that the U.S. unemployment rate would peak at the end of this year.

Although economists generally expect the jobless rate, which hit 9.5% in June, to keep rising into the first half of next year, Bernanke suggested that the labor market could begin a recovery sooner.

Even so, Bernanke told lawmakers Tuesday that hiring would not bounce back fast.

"We have a very long haul here," he said in response to a question during the Fed's semiannual monetary policy report to Congress. "Unemployment is going to stay high for quite a while, and so it's not going to feel really like a strong economy."

In his prepared remarks, Bernanke noted recent improvements in credit markets and other financial conditions and predicted that economic growth would turn positive in the second half of this year, gradually recovering next year and accelerating in 2011.

But he raised concerns about consumer spending, which accounts for about 70% of the U.S. gross domestic product, saying that it would be constrained by job insecurity, tight credit and declining home prices. The central bank chairman said foreclosures also were headed higher.

"The combination of unemployment and falling house prices -- the double trigger -- does create a very high rate of foreclosures," he said. "Our assessment of the foreclosures is that it's likely to peak in the second half of 2009, corresponding with the peak in the unemployment rate and, perhaps, be somewhat less in 2010."

Given the fragile economic conditions, Bernanke reiterated that the key federal funds rate was likely to remain at "exceptionally low levels for an extended period." The Fed has maintained the rate that banks charge one another for overnight loans near zero since December.

At the same time, Bernanke took great pains to allay concerns that the Fed's extraordinary policy measures to boost the economy during the crisis, including programs to buy billions of dollars of Treasury and mortgage-backed securities, would lead the nation down the path of unstoppable inflation.

In remarks to lawmakers and in a 1,300-word opinion article in Tuesday's Wall Street Journal, Bernanke laid out a number of steps that he said the Fed could take to tighten policy in "a smooth and timely manner."

The Fed, for example, has the ability to pay interest rates on reserves held at the central bank, which would spark a rise in market rates.

"We are confident that we have the necessary tools to implement that strategy when appropriate," he said in his remarks to Congress, noting that some of the emergency measures already have started to unwind. For example, the total credit extended by the Fed to banks and other entities has fallen below $600 billion from about $1.5 trillion at the end of 2008, he said.

Bernanke's comments and accompanying article took some on Wall Street by surprise.

"Bernanke and the Fed went on the offensive today," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon, an asset management firm. "His quick one-two strike defused residual concerns of inflation."

Bernanke seemed to have less success winning over members of Congress, especially those who have stepped up criticisms of the Fed in recent months over its role in the bailout of American International Group Inc. and Bank of America Corp.'s purchase of Merrill Lynch & Co., among other actions.

Although the two-hour give-and-take with members of the House Financial Services Committee was not combative, as was a hearing that Bernanke faced in the House last month, the chairman was again on the defensive as some lawmakers called for more transparency and greater oversight of the Fed. A pending bill would have the Fed audited by the Government Accountability Office. Bernanke said that could impinge on the central bank's independence.

"We have to be extraordinarily careful that the markets and the public don't think Congress is trying to influence monetary policy decisions," Bernanke said.

Republican lawmakers also used the occasion to criticize President Obama's $787-billion economic stimulus package. In response to a question about that, Bernanke told lawmakers he believed that it has helped to support consumer spending and strapped local governments. But he said it was too early to assess its overall effectiveness.


Los Angeles Times Articles