Fed Chief Says Recovery May Wait Until 2010 or Later

WASHINGTON (By Catherine Rampell and Jack Healy, NYT) February 24, 2010 — As President Obama prepared to make a major Congressional address laying out his plans to lift the faltering economy, the chairman of the Federal Reserve, Ben S. Bernanke, warned on Today the downturn could get even worse than recent forecasts.

Mr. Bernanke told the Senate Banking Committee the Federal Reserve was doing everything it could to unlock credit markets and ease the financial crisis, but he said it could take until 2010 before government’s actions gain traction.

“If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability — and only if that is the case, in my view — there is a reasonable prospect the current recession will end in 2010 and that 2010 will be a year of recovery,” Mr. Bernanke said.

Mr. Obama’s speech on Tuesday, while not a formal State of the Union message, is his first to Congress and will provide a platform for him to outline a blueprint to economic recovery, as well as a broad agenda on education, health care and energy.

On Tuesday, two barometers of the housing market and consumer attitudes underscored the economy’s downward trajectory.

Home prices in the United States plunged at the fastest pace on record in December, according to a closely watched measure of the housing market, signaling housing was likely to continue declining.

Consumer confidence also fell, according to a report released Tuesday by the private Conference Board. The group’s index of consumer confidence dropped to a new low of 25 in February, from 37.4 a month earlier, as people fretted about losing their jobs or earning less, and worsening prospects over the next six months.

In the first leg of Mr. Bernanke’s twice-annual report to both houses of Congress on the state of the economy and the Fed’s actions, he painted a dire picture of the markets going forward, but assured the committee government agencies were taking all necessary actions to thaw credit markets.

“The measures taken by the Federal Reserve, other U.S. government entities, and foreign governments since September have helped to restore a degree of stability to some financial markets,” Mr. Bernanke said in testimony. “Nevertheless, despite these favorable developments, significant stresses persist in many markets.”

In particular, he said, most securitization markets “remain shut.”

As required by law, Mr. Bernanke addressed both halves of the Fed’s dual mandate: stable prices and maximum employment. The former part of the mission has largely been met, with prices more or less unchanged from their level a year ago, and inflation is expected to glide under 1 percent during 2010.

But labor market conditions continue to deteriorate. Citing projections by the Fed’s Open Market Committee in January, he said the unemployment rate, which hit 7.6 percent in January, would probably reach 8.5 to 8.75 percent in the fourth quarter. The country’s gross domestic product is projected to decline 0.5 to 1.25 percent this year, he said, and foreclosure rates remain high.

But he added, “This outlook for economic activity is subject to considerable uncertainty, and I believe, over all, the downside risks probably outweigh those on the upside.”

The uncertainty was clearly reflected in Tuesday’s housing report, where the rapidly deteriorating economy and rising unemployment have scared off potential buyers. According to the survey of the Conference Board, 2.3 percent of the people surveyed plan to buy a home in the next six months, down from 2.9 percent last February.

Single-family home values in 20 major metropolitan areas fell 18.5 percent in December compared with a year earlier, according to a data released Tuesday by Standard & Poor’s Case-Shiller home price index. Housing prices dropped 2.5 percent from November to December.

“There are so many homes out there, and there’s so much momentum behind falling prices they’re going to continue to drop regardless of anything, including the Obama plan,” said Patrick Newport, United States economist at IHS Global Insight.

A week ago, President Obama laid out a $275 billion plan to help as many as nine million families refinance their mortgages or avoid foreclosures using a variety of incentives and subsidies to try to lower interest rates and the principal on existing home mortgages.

The plan would be available for mortgages not more than 5 percent below the current market value of a house, which could leave out homeowners in cities whose real-estate prices have receded the most.

Nationwide, housing prices in the last three months of 2008 sank to their lowest levels since the third quarter of 2003.

“It’s a deflationary spiral,” said Dan Greenhaus, an analyst in the equity strategy division of Miller Tabak & Company. “Prices go down, people hold back, prices go down further, people hold back, and so on and so forth.”

Prices fell in all of the 20 cities surveyed by Case-Shiller, but the declines were starkest in Phoenix and Las Vegas as well as much of Florida and Southern California.

“We continue to believe it is unlikely we are anywhere near a bottom in nationwide home prices,” Joshua Shapiro, chief United States economist at MFR, wrote in a note.

Mr. Bernanke testified the international nature of the slowdown, added to a “so-called adverse feedback loop” the idea that economic and financial conditions become mutually reinforcing, threaten to delay recovery.

He urged support for the significant — and in many cases, unpopular — fiscal and monetary interventions the government has made into the economy thus far.

The Fed has taken some extraordinary steps in the hopes of increasing the flow of credit to businesses and households. In December the Federal Open Market Committee lowered its key interest rate to virtually zero, its floor.

The Fed has been buying mortgage-backed securities — considered the leading cause of the meltdown after the housing bubble burst — that have been guaranteed by the federal government.

It has also begun unprecedented programs as a lender.

It has expanded the Term Auction Facility, which loans to banks. It has introduced the Term Asset Backed Securities Loan Facility, which finances consumer loans, and which the Fed recently announced it would expand in both size and scope; and the Commercial Paper Funding Facility, which provides loans in exchange for short-term business i.o.u.’s.

Mr. Bernanke said these actions had contributed to improvements in short-term funding markets and the commercial paper market, and declines in the conforming fixed mortgage rate and the London Interbank Offered Rate (Libor), the rate on which borrowing costs for consumers and businesses are often based.

The Fed has also been working in partnership with the Treasury Department, led by Secretary Timothy F. Geithner, to coordinate intervention in the financial markets.

On Monday, the Treasury, the Fed and bank regulators announced that the government might demand direct ownership in major banks after they undergo a “stress test” to determine their viability going forward.

The test, which will be applied to the 20 biggest banks, will be used to measure whether banks have enough capital to survive a worsening downturn.

While Monday’s statement stopped short of announcing a plan to “nationalize” any banks, it indicated that banks that failed to pass the test would be forced to accept a plan to return them to solvency using capital from public and private funds.

In his testimony, Mr. Bernanke also addressed criticisms regarding a lack of transparency in the administration of these and other programs.

He discussed additional reports the Fed had been providing to Congress, and a newly unveiled Web site on the Fed’s lending programs. He also noted the Fed’s vice chairman, Donald Kohn, was heading a committee to review the agency’s publications and disclosure policies.