Bernanke offers optimism on economy

Government efforts to stabilize the financial system are progressing and there are tentative signs that the economic crisis is abating, Federal Reserve Chairman Ben Bernanke will say in a speech Tuesday.

Bernanke said new data on home sales, homebuilding and consumer spending suggest the sharp decline in economic activity may be slowing, but he said this “leveling out” of economic activity is but the first step toward recovery.

{mosads}”To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets,” Bernanke will say, according to prepared remarks for an address Tuesday at Morehouse College in Atlanta. “We are making progress on that front as well, and the Federal Reserve is committed to working to restore financial stability as a necessary step toward full economic recovery.”

Bernanke pronounces himself “fundamentally optimistic” about the economy.
“Today’s economic conditions are difficult, but the foundations of our economy are strong and we face no problems that cannot be overcome with insight, patience and persistence.”

He also defends the massive and unprecedented interventions taken by the Fed to grapple with the worst recession in decades, including the specific decision to bail out insurance giant AIG. The Fed’s main tool in acting to contain financial problems is to raise or lower short-term interest rates, and it has brought that basic rate to nearly zero. But Bernanke acknowledges the Fed went far beyond conventional monetary policy in dealing with the crisis.

“In doing so, we have demonstrated that the Fed’s toolkit remains potent, even though the federal funds rate is close to zero and thus cannot be reduced further,” he says in his remarks.

Bernanke did not back away from a strong Fed, which he said would continue “to take the necessary steps” to strengthen the economy. Noting fears that the Fed’s aggressive actions could spur on inflation once the economy recovers, Bernanke says he is prepared to take actions to counter inflationary growth.

“I can assure you that monetary policy makers are fully committed to acting as needed to withdraw on a timely basis the extraordinary support now being provided to the economy, and we are confident in our ability to do so,” the remarks state.

While Congress has approved a nearly $800 billion stimulus package to grow the economy, and the Treasury Department has spent much of a $700 billion rescue package for financial firms, those efforts are actually dwarfed by the Fed, which has spent trillions as part of an effort to prevent an even worse recession.