The U.S. economy has shown tentative signs of stabilization, Federal Reserve Chairman Ben Bernanke told members of Congress Tuesday, although the labor market still hasn't found its footing yet. In his semi-annual monetary policy report to the House Committee on Financial Services, Bernanke argued that "the pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization." "The labor market, however, has continued to weaken," Bernanke said in his testimony. "Although the unemployment rate is projected to peak at the end of this year, the projected declines in 2010 and 2011 would still leave unemployment well above
Federal Open Market Committee participants' views of the longer-run sustainable rate." He added that financial conditions remain "stressed" and that many households and businesses "are finding credit difficult to obtain." Bernanke also asserted that aggressive policy actions taken around the world last fall "may well have averted the collapse of the global financial system, an event that would have had extremely adverse and protracted consequences for the world economy." The FOMC, the policy-making arm of the Fed, anticipates that economic conditions are likely to warrant maintaining the federal funds rate at exceptionally low levels for an extended period, Bernanke said. The Fed chairman said the central bank feels it is important to assure the public and the markets that the "extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation."
"The FOMC has been devoting considerable attention to issues relating to its exit strategy, and we are confident that we have the necessary tools to implement that strategy when appropriate," Bernanke said. In an op-ed piece for The Wall Street Journal Tuesday, Bernanke offered a look at the central bank's plans once the economy recovers, saying the Fed will act decisively to prevent excess money growth from stirring up inflation. "My colleagues and I believe that accommodative policies will likely be warranted for an extended period," Bernanke wrote in the Journal piece. "At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road." Ian Shepherdson, chief economist with High Frequency Economics, argued that if there is to be no substantive improvement in the labor market this year or next, Bernanke seems deeply disinclined to tighten. "The risk of deflation, though he did not say so, is still real," Shepherdson said in an emailed statement. "Mr. Bernanke's emphasis on the grim state of the labor market ... suggests any tightening will not start until unemployment starts to come down," Shepherdson added. "That would be entirely in keeping with previous Fed behavior. Rates almost always start to rise when unemployment peaks or is obviously about to do so. On our reckoning, that means 2011 at the soonest."