US and international efforts to stem the recession are starting to take hold and the pace of economic decline seems to have slowed, but foreclosures and unemployment won’t peak until the second half of 2009 (H209), according to Federal Reserve chairman Ben Bernanke. Continued measures, like a extremely low federal funds rate, will be needed to get the economy back on track, Bernanke told the House Financial Services Committee on Tuesday. “The [Federal Open Market Committee] anticipates that economic conditions are likely to warrant maintaining the federal funds rate at exceptionally low levels for an extended period,” Bernanke said, according to prepared testimony. But keeping the federal funds rate low isn’t the only tool the Federal Reserve has at its disposal to improve the economy without letting inflation get out of hand. Bernanke told the committee that Congress’ decision last fall to let the Fed pay interest on balances held at the Fed by depository institutions will help leverage the impact of the low federal funds rate and other short-term market interest rates because banks will not loan money at interest rates much lower than what they could get keeping their money safe with the Fed. “We are confident that we have the tools to raise interest rates when that becomes necessary to achieve our objectives of maximum employment and price stability,” Bernanke said. Bernanke said the Fed’s credit extensions to banks and other financial institutions have declined from $1.5trn at the end of 2008 to less than $600bn now. Bernanke also addressed the need for improved supervision and regulation of the financial sector, calling for “comprehensive reform,” including stronger capital and liquidity standards for financial firms, consolidating oversight and enhancing protection for consumers. The chairman also called for a new mechanism to quickly deal with financially troubled nonbank institutions without disrupting the rest of the financial system. Bernanke called for this enhanced bankruptcy or resolution regime to be modeled after the current system used for depository institutions. Such a regime could have been used during the crises American International Group (AIG) and Bear Stearns faced last year, he said. While the Fed and other government entities continue to help in the economic recovery, Bernanke warned other challenges lie ahead for the nation’s fiscal sustainability, namely the pending retirement of the baby-boom generation and the continued increases in the costs of Medicare and Medicaid. “Prompt attention to questions of fiscal sustainability is particularly critical,” Bernanke said. “Addressing the country’s fiscal problems will require difficult choices, but postponing those choices will only make them more difficult.” Write to Austin Kilgore.
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