The Federal Reserve chairman, Ben Bernanke, told Congress yesterday that the US economy was showing tentative signs of stabilisation, while assuring Wall Street that he could contain unprecedented stimulus measures and prevent inflation spoiling a recovery.
However, Mr Bernanke warned that record budget deficits could pose a threat to the recovery which has been primed by extending more than US$1 trillion (Dh3.67tn) to the economy over the past year. "Unless we demonstrate a strong commitment to fiscal sustainability, we risk having neither financial stability nor durable economic growth," Mr Bernanke said. His comments came after earlier assurances of a recovery from the US Treasury secretary, Timothy Geithner, who visited the Gulf last week.
Fed officials said in a report submitted as part of Mr Bernanke's testimony that policy will be tightened when the labour market improves, an economic recovery takes hold and pressures holding down inflation diminish. The comments came after a rally in stocks and a rebound in corporate earnings that have increased speculation that the worst recession in half a century is ending. Mr Bernanke defended the central bank's actions to restore financial stability, urged politicians to lay plans for reining in the deficit, and warned Congress against impinging on the Fed's independence.
Mr Bernanke has countered the credit crisis with actions unprecedented in the central bank's 95-year history, cutting the benchmark lending rate to zero and flooding the banking system with cash. Yesterday he detailed how the Fed can reverse the stimulus "when appropriate", and expressed confidence that the central bank had tools to prevent any inflation surge. He said dangers remained, and did not make any comments indicating that a sustained recovery has yet taken hold. Mr Bernanke said that financial markets remain stressed, and household spending was an important risk to the outlook because of continued job losses and declines in home values.
The Fed has expanded credit to the economy by $1.1tn over the past year. Mr Bernanke is leading plans to buy as much as $1.25tn of mortgage-backed securities and $200bn of federal agency debt by the end of the year, and $300bn of long-term treasuries by September. The US economy shrank at an annual rate of 5.5 per cent in the first quarter, after a 6.3 per cent annual rate of decline in the final three months of last year, the worst back-to-back quarterly performance in a half century. Companies slashed inventories at an annual pace of $87.1bn in the first three months, the biggest drop on record.
Congress has questioned the Fed's use of extraordinary powers, and the central bank may face one of the biggest revisions of its regulatory authorities and mandates since the Great Depression. A Treasury proposal on overhauling regulations would strip the Fed of consumer-protection authority and limit its independence on emergency loans, while expanding the central bank's oversight of financial system risk.
* with Bloomberg scronin@thenational.ae