Ben S Bernanke: Economic outlook
Testimony by Mr Ben S Bernanke, Chairman of the Board of Governors of the Federal
Reserve System, before the Joint Economic Committee, US Congress, Washington DC,
14 April 2010.
The original speech, which contains various links to the documents mentioned, can be found on the US Federal
Reserve System's website.
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Chair Maloney, Vice Chairman Schumer, Ranking Members Brownback and Brady, and
other members of the Committee, I am pleased to be here today to discuss economic and
financial developments. I will also make a few remarks on the fiscal situation.
The economic outlook
Supported by stimulative monetary and fiscal policies and the concerted efforts of
policymakers to stabilize the financial system, a recovery in economic activity appears to
have begun in the second half of last year. An important impetus to the expansion was firms'
success in working down the excess inventories that had built up during the contraction,
which left companies more willing to expand production. Indeed, the boost from the slower
drawdown in inventories accounted for the majority of the sharp rise in real gross domestic
product (GDP) in the fourth quarter of last year, during which real GDP increased at an
annual rate of 5.6 percent. With inventories now much better aligned with final sales,
however, and with the support from fiscal policy set to diminish in the coming year, further
economic expansion will depend on continued growth in private final demand.
On balance, the incoming data suggest that growth in private final demand will be sufficient
to promote a moderate economic recovery in coming quarters. Consumer spending
continued to increase in the first two months of this year and has now risen at an annual rate
of about 2-1/2 percent in real terms since the middle of 2009. In particular, after slowing in
January and February, sales of new light motor vehicles bounced back in March as
manufacturers offered a new round of incentives. Going forward, consumer spending should
be aided by a gradual pickup in jobs and earnings, the recovery in household wealth from
recent lows, and some improvement in credit availability.
In the business sector, capital spending on equipment and software appears to have
increased at a solid pace again in the first quarter. U.S. manufacturing output, which is
benefiting from stronger export demand as well as the inventory adjustment I noted earlier,
rose at an annual rate of 8 percent during the eight months ending in February. Also, as I will
discuss further in a moment, financial conditions continue to strengthen, thus reducing an
important headwind for the economy.
To be sure, significant restraints on the pace of the recovery remain, including weakness in
both residential and nonresidential construction and the poor fiscal condition of many state
and local governments. Sales of new and existing homes dropped back in January and
February, and the pace of new single-family housing starts has changed little since the
middle of last year. Outlays for nonresidential construction continue to contract amid rising
vacancy rates, falling property prices, and difficulties in obtaining financing. Pressures on
state and local budgets, though tempered by ongoing federal support, have led to continuing
declines in employment and construction spending by state and local governments.
As you know, the labor market was particularly hard hit by the recession. Recently, we have
seen some encouraging signs that layoffs are slowing and that employment has turned up.
Manufacturing employment increased for a third month in March, and the number of
temporary jobs - often a precursor of more permanent employment - has been rising since
last October. New claims for unemployment insurance continue on a generally downward
trend. However, if the pace of recovery is moderate, as I expect, a significant amount of time
will be required to restore the 8-1/2 million jobs that were lost during the past two years. I am
particularly concerned about the fact that, in March, 44 percent of the unemployed had been
without a job for six months or more. Long periods without work erode individuals' skills and
hurt future employment prospects. Younger workers may be particularly adversely affected if
a weak labor market prevents them from finding a first job or from gaining important work
experience.
On the inflation front, recent data continue to show a subdued rate of increase in consumer
prices. For the three months ended in February, prices for personal consumption
expenditures rose at an annual rate of 1-1/4 percent despite a further steep run-up in energy
prices; core inflation, which excludes prices of food and energy, slowed to an annual rate of
1/2 percent. The moderation in inflation has been broadly based, affecting most categories of
goods and services with the principal exception of some globally traded commodities and
materials, including crude oil. Long-run inflation expectations appear stable; for example,
expected inflation over the next 5 to 10 years, as measured by the Thomson
Reuters/University of Michigan Surveys of Consumers was 2-3/4 percent in March, which is
at the lower end of the narrow range that has prevailed for the past few years.
Financial market developments
Financial markets have improved considerably since I last testified before this Committee in
May of last year. Conditions in short-term credit markets have continued to normalize;
spreads in bank funding markets and the commercial paper market have returned to near
pre-crisis levels. In light of these improvements, the Federal Reserve has largely wound
down the extraordinary liquidity programs that it created to support financial markets during
the crisis. The only remaining program, apart from the discount window, is the Term
AssetBacked Securities Loan Facility for loans backed by new-issue commercial mortgage-backed
securities, and that facility is scheduled to close at the end of June. Overall, the Federal
Reserve's liquidity programs appear to have made a significant contribution to the
stabilization of the financial system, and they did so at no cost to taxpayers and with no credit
losses.
The Federal Reserve also recently completed its purchases of $1.25 trillion of federal agency
mortgage-backed securities and about $175 billion of agency debt. Purchases under these
programs were phased down gradually, and to date, the transition in markets has been
relatively smooth. The Federal Reserve's asset-purchase program appears to have improved
market functioning and reduced interest-rate spreads not only in the mortgage market but in
other longer-term debt markets as well.
On net, the financial condition of banking firms has strengthened markedly during recent
quarters. Last spring, the Federal Reserve and other banking regulators evaluated the
nation's largest bank holding companies under the Supervisory Capital Assessment
Program, popularly known as the stress test, to ensure that they would have sufficient capital
to remain viable and to lend to creditworthy borrowers even in a worse-than-expected
economic scenario.1 The release of the stress test results significantly increased market
confidence in the banking system. Greater investor confidence in turn allowed the banks to
raise substantial amounts of new equity capital and, in many cases, to repay government
capital. The Federal Reserve and other bank regulators continue to encourage the banks to
build up their capital, ensure that they have adequate liquidity, improve their risk
management, and restructure their employee compensation programs to better align risk and
reward.
Despite their stronger financial positions, banks' lending to both households and businesses
has continued to fall. The decline in large part reflects sluggish loan demand and the fact that
many potential borrowers no longer qualify for credit, both results of a weak economy. The
high rate of write-downs has also reduced the quantity of loans on banks' books. Banks have
also been conservative in their lending policies, imposing tough lending standards and terms;
this caution reflects bankers' concerns about the economic outlook and uncertainty about
their own future losses and capital positions.
The Federal Reserve has been working to ensure that our bank supervision does not
inadvertently impede sound lending and thus slow the recovery. Achieving the appropriate
balance between necessary prudence and the need to continue making sound loans to
creditworthy borrowers is in the interest of banks, borrowers, and the economy as a whole.
Toward this end, in cooperation with the other banking regulators, we have issued policy
statements to bankers and examiners emphasizing the importance of lending to creditworthy
customers, working with troubled borrowers to restructure loans, managing commercial real
estate exposures appropriately, and taking a careful but balanced approach to small
business lending.2 We have accompanied our guidance with training programs for both
Federal Reserve and state examiners, and with outreach to bankers throughout the industry.
For example, we just completed a training initiative that reached about 1,000 examiners. We
are also conducting a series of meetings across the country with private- and public-sector
partners to gather information about the credit needs of small businesses and how those
needs can best be met.
We have also stepped up our information gathering, so that we can better understand factors
that may be inhibiting bank lending. These efforts include a survey by examiners of banks'
practices in working out loans, the results of which will serve as a baseline against which we
will assess the effectiveness of our supervisory guidance. We are also obtaining additional
information on small business credit conditions. For example, we assisted the National
Federation of Independent Business in developing a survey to assess barriers to credit
access by small businesses.3 And we are using our own Senior Loan Officer Opinion Survey
on Bank Lending Practices to monitor changes in bank lending to small businesses.4
2
See Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the
Comptroller of the Currency, and Office of Thrift Supervision (2008), "Interagency Statement on Meeting the
Needs of Creditworthy Borrowers", joint press release, November 12; Board of Governors of the Federal
Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the
Comptroller of the Currency, Office of Thrift Supervision, and Conference of State Bank Supervisors (2010),
"Regulators Issue Statement on Lending to Creditworthy Small Businesses", joint press release, February 5;
Board of Governors of the Federal Reserve System, Division of Banking Supervision and Regulation (2009),
"Prudent Commercial Real Estate Loan Workouts", Supervision and Regulation Letter SR 09-7 (October 30);
and Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Federal Reserve
Board, Federal Financial Institutions Examination Council and Office of Thrift Supervision (2009), "Policy
Statement on Prudent Commercial Real Estate Loan Workouts", joint policy statement, October 30.
3
See William J. Dennis (2010), "Small Business Credit in a Deep Recession", National Federation of Small
Business Research Foundation (Washington: NFIB, February).
4
See Board of Governors of the Federal Reserve System, "Senior Loan Officer Opinion Survey on Bank
Lending Practices".
BIS Review 49/2010
Fiscal policy
In addition to the near-term challenge of fostering improved economic performance and
stronger labor markets, we as a nation face the difficult but essential task of achieving
longer-term sustainability of the nation's fiscal position. The federal budget deficit is on track
this year to be nearly as wide as the $1.4 trillion gap recorded in fiscal year 2009. To an
important extent, these extremely large deficits are the result of the effects of the weak
economy on revenues and outlays, along with the necessary actions that were taken to
counter the recession and restore financial stability. But an important part of the deficit
appears to be structural; that is, it is expected to remain even after economic and financial
conditions have returned to normal.
In particular, the Administration and the Congressional Budget Office (CBO) project that the
deficit will recede somewhat over the next two years as the temporary stimulus measures
wind down and as economic recovery leads to higher revenues. Thereafter, however, the
annual deficit is expected to remain high through 2020, in the neighborhood of 4 to 5 percent
of GDP. Deficits at that level would lead the ratio of federal debt held by the public to the
GDP, already expected to be greater than 70 percent at the end of fiscal 2012, to rise
considerably further. This baseline projection assumes that most discretionary spending
grows more slowly than nominal GDP, that no expiring tax cuts are extended, and that
current provisions that provide most taxpayers relief from the alternative minimum tax are not
further extended. Under an alternative scenario that drops those assumptions, the deficit at
the end of 2020 would be 9 percent of GDP and the federal debt would balloon to more than
100 percent of GDP.5
Although sizable deficits are unavoidable in the near term, maintaining the confidence of the
public and financial markets requires that policymakers move decisively to set the federal
budget on a trajectory toward sustainable fiscal balance. A credible plan for fiscal
sustainability could yield substantial near-term benefits in terms of lower long-term interest
rates and increased consumer and business confidence. Timely attention to these issues is
important, not only for maintaining credibility, but because budgetary changes are less likely
to create hardship or dislocations when the individuals affected are given adequate time to
plan and adjust. In other words, addressing the country's fiscal problems will require difficult
choices, but postponing them will only make them more difficult.
Thank you. I would be pleased to take your questions.