Published: Tue, 24 Feb 2009 16:50:30 +0100

Fed's Bernanke Says Full Economic Recovery Two to Three Years Away (Update)

(CEP News) - Federal Reserve Chairman Ben Bernanke said the start of an economic recovery could begin in 2010, but that a full recovery is at least another two to three years away.

During his semi-annual testimony before the U.S. Senate Banking Committee, Bernanke noted that the start of an economic recovery in 2010 will only be possible with a stabilization in markets and banks and "strong" government action.

"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 that the current recession will end in 2009 and that 2010 will be a year of recovery," Bernanke said in his prepared opening remarks.

However, he noted the view of policy-makers that "a full recovery of the economy from the current recession is likely to take more than two or three years."

He said the economic outlook is subject to "considerable uncertainty" and that "the downside risks probably outweigh those on the upside." He said one such risk is the global nature of the slowdown, which is hurting U.S. exports and financial conditions.

The chairman also said the Fed's "exceptionally low" interest rates will be in place for some time as "significant stresses" persist in many markets. He forecasts the "sharp contraction" to continue into the first quarter.

Bernanke noted further that the Fed is committed to using "all available tools" to help the economy out of the current "severe contraction."

He also promised that the Term Asset-backed Securities Loan Facility (TALF) would begin extending loans "soon."

Observers noted there was no mention of the Federal Reserve buying Treasuries, suggesting the plan is currently on hold.

"The Fed wants time to gauge the success of its existing programs and the new TALF before initiating any Treasury purchase program," said Paul Dales, an economist from Capital Economics.

By Stephen Huebl, shuebl@economicnews.ca, edited by Sarah Sussman, ssussman@economicnews.ca