His replies confirm economy is in recession: analysts
(NEW YORK) US Federal Reserve chairman Ben Bernanke didn’t utter the word, but analysts reading between the lines of his testimony to the US Congress this week say that he came as close as a central bank chief can to acknowledging the chances of recession.
Since the start of the global credit squeeze in mid-2007, the Fed has been cautious about suggesting US economic and financial conditions could get worse, in part for fear that markets might overreact.
Yet speaking before Congress on Thursday, the Fed chairman held true to his vow for greater transparency, predicting that economic growth, which slowed sharply in the fourth quarter of 2007, would not return to normal levels until at least 2010.
‘While the National Bureau of Economic Research (NBER) has yet to decide whether the US economy is in recession, Mr Bernanke’s replies have all but confirmed the economy is already in recession,’ said Ashraf Laidi, chief foreign exchange strategist at CMC Markets US in New York.
The NBER is considered the official arbiter of US recessions, but their calls tend to lag the actual start of a contractionary period by about three to six months.
Not only did Mr Bernanke offer a glum outlook for growth complicated by rising inflation, he also indicated that even his already depressed forecasts might be overly optimistic.
‘The risks to this outlook remain to the downside,’ Mr Bernanke said. ‘The risks include the possibilities that the housing market or labour market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.’
It is not difficult to see how some observers might interpret strong words as these from a measured man like Mr Bernanke as a sign of real concern.
‘If you acknowledge a recession it’s your fault, so that’s one reason not to be the first to do it,’ said Alan Skrainka, chief market strategist at Edward Jones, in St Louis, Missouri.
The threat of a prolonged recession is not negligible. What started as a US housing market slump has since spread through the financial system like a wildfire, beginning with assets directly linked to sub-prime mortgages and then extending to bonds formerly deemed safe as mistrust in the banking sector soared to new heights.
Mr Bernanke also attempted to rein in inflation expectations by saying the central bank would remain vigilant on price pressures which have become more apparent after both producer and consumer inflation jumped in data released this month.
These developments not only complicated the Fed’s task of regulating the monetary lever, but could also paradoxically worsen the economic situation. Since any possible recession is expected to be driven by a retrenchment in consumer spending, further damage to purchasing power from rising costs could force a downward spiral.
The economy is not close to a 1970s-style mix of stagnant growth and high inflation, Mr Bernanke told the Senate banking committee, but he painted a generally dour outlook and cautioned that the downturn is likely to cause some small banks to go under.
‘I don’t anticipate stagflation,’ he said.
Some analysts have become increasingly worried about that possibility after recent high readings on inflation and weak readings on growth.
‘I don’t think we’re anywhere near the situation that prevailed in the 1970s,’ he said.
Source: Reuters, LAT-WP (Business Times 1 Mar 08)