WASHINGTON – May 6, 2009 – Federal Reserve Chairman Ben Bernanke said Tuesday that he expects the recession to end later this year and suggested an upcoming government report could increase confidence in the nation’s big banks.
But Bernanke also said major sectors of the economy remain weak, there will likely be “further sizable job losses,” and the recovery will be slow.
“We continue to expect economic activity to bottom out, then to turn up later this year,” he told the Joint Economic Committee of Congress.
He said he expects unemployment – at 8.5 percent in March – to peak early next year short of 10 percent, but it could stay high for a time.
Some economists have forecast a 10 percent jobless rate.
In February, the Fed chairman predicted a recovery later this year, but on Tuesday, he ticked off fresh signs to back that view. Consumer spending rose 2.2 percent in the first quarter after falling sharply the second half of 2008. And the housing market shows “signs of bottoming,” he said.
While businesses are swiftly liquidating inventories, hurting growth, Bernanke said that clears the way for increased production when demand rebounds. A key index released Tuesday showed service industries shrinking more slowly in April.
Bernanke’s earlier forecast “was much more sketchy,” says Brian Bethune, chief economist at IHS Global Insight.
Bernanke said the economy remains weak. Gross domestic product fell at an annual rate of more than 6 percent the past six months. “A relapse in financial conditions” could stall a recovery, he said.
Financial markets are nervously awaiting results of “stress tests” of 19 large banks.
The results, to be released after stock markets close Thursday, are expected to show whether they have enough capital to withstand a worsening economy.
Banks that need more cash will have six months to raise it before tapping government bailout money. A report from Friedman Billings Ramsey predicts at least 11 banks will need more funds.
Bernanke said many should be able to raise equity or use other means to increase their capital without getting more federal money and that he hopes the program “will restore confidence” in banks.
Some are skeptical. “A lot of people who participated when banks raised capital in the last year know what bad investments they turned out to be,” says Alan Villalon of First American Funds.