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Federal Reserve Chairman Ben Bernanke said Wednesday that the efforts taken by the Federal Reserve, the U.S. Treasury and other government authorities to stabilize the financial system in the wake of the 2008 financial collapse helped to halt economic decline and are contributing to the current economic recovery.
Speaking before the U.S. House Committee on Financial Services, Bernanke highlighted the economy's four percent growth rate in the second half of 2009, but said that a sustained recovery will depend on growth in private sector demand for goods and services.
Bernanke and the Fed have been under close scrutiny since the financial crisis, and have come under fire from lawmakers on both sides of the aisle who believe that the central bank did not do enough to regulate the large financial firms whose financial troubles led to the economic collapse.
The Fed chief went on to add that deterioration in the labor market seems to be slowing, citing recent decreases in job losses and a modest January rise in full-time manufacturing jobs. He pointed out, however, that weaknesses still remain in the job market.
"Notwithstanding these positive signs, the job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce," he said in prepared remarks. "Of particular concern, because of its long-term implications for workers' skills and wages, is the increasing incidence of long-term unemployment; indeed, more than 40 percent of the unemployed have been out of work six months or more, nearly double the share of a year ago."
He pointed out later in the testimony that the Fed expects the unemployment rate to fall to 6.5-7.5 percent by the end of 2012, well above the "long-term sustainable rate" of five percent.
Speaking on inflation, Bernanke said that slack in the labor markets and a flattening of oil prices will keep inflation subdued for some time.
Bernanke stressed that current economic conditions and low inflation expectation will keep the target for the federal funds rate at near zero levels.
Bernanke also reiterated that the Fed's mortgage-backed securities purchases will be completed by the end of March as planned, though the central bank will continue to evaluate securities purchases as the economic outlook evolves.
Bernanke touched on the Fed's surprising announcement last week to raise the discount rate to 0.75 percent, and the decision to shorten the maximum term of discount window loans to overnight for most banks, saying that improved financial conditions are limiting the need for Fed assistance.
"These changes, like the closure of most of the special lending facilities earlier this month, are in response to the improved functioning of financial markets, which has reduced the need for extraordinary assistance from the Federal Reserve," he said.
The Fed chief also talked about new tools to unwind its accommodative monetary policy, including expansion of reverse repurchase agreements and a term deposit facility "that could convert a portion of depository institutions' holdings of reserve balances into deposits that are less liquid and could not be used to meet reserve requirements."
Speaking on regulatory reform, Bernanke said that the central bank has been conduction a self-examination of its regulatory responsibilities.
"The Federal Reserve has been playing a key role in international efforts to toughen capital and liquidity requirements for financial institutions, particularly systemically critical firms, and we have been taking the lead in ensuring that compensation structures at banking organizations provide appropriate incentives without encouraging excessive risk-taking," he said.
He concluded, "More generally, the Federal Reserve is committed to doing all that can be done to ensure that our economy is never again devastated by a financial collapse. We look forward to working with the Congress to develop effective and comprehensive reform of the financial regulatory framework.
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