- The Washington Times - Tuesday, July 21, 2009

The Federal Reserve, which lowered its target overnight interest rate to near zero last year, expects to maintain that rate “at exceptionally low levels for an extended period,” Fed Chairman Ben S. Bernanke told the House Financial Services Committee on Tuesday morning.

Economic output should “increase slightly” during the second half of 2009, the Fed chairman said. “The recovery is expected to be gradual in 2010, with some acceleration in activity in 2011,” he said. The Fed’s latest economic forecast expects the unemployment rate to peak at the end of this year near 10 percent. However, “the projected declines in 2010 and 2011 would still leave unemployment well above” the Fed’s view of the longer-run sustainable rate.

“On net, the past few months have seen some notable improvements,” Mr. Bernanke said in his semiannual testimony before Congress.

Among these improvements he included the narrowing of interest-rate spreads in short-term money markets, such as the markets for commercial paper and interbank lending. The Fed chairman said that “the extreme risk aversion of last fall” has eased. Many markets were functioning more normally, and corporate bond issuance had been strong, he told the committee.

Mr. Bernanke insisted that many of the improvements in financial conditions could be traced to the extraordinary policy actions undertaken by the Fed in the face of the worst financial crisis and the deepest economic downturn since the Great Depression.

Nevertheless, the Fed chairman acknowledged that financial conditions remained stressed today, and many households and businesses continued to find credit difficult to obtain.

The rate of job loss remains high, and the unemployment rate has continued its steep rise, Mr. Bernanke noted. He warned that job insecurity, combined with falling home values and tight credit, likely would limit rises in consumer spending, which makes up more than 70 percent of gross domestic product. Thus, a major downside risk to the economy is the possibility that the recent stabilization in household spending could prove transient.

On fiscal policy, Mr. Bernanke said, “Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and the continued increases in the costs of Medicare and Medicaid.”

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