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April 2, 2008 - Testifying before Congress’ Joint Economic Committee, Federal Reserve (Fed) Chairman Ben Bernanke explains the Fed’s strong actions to increase market liquidity and address the current economic condition.
“Although our recent actions appear to have helped stabilize the situation somewhat, financial markets remain under considerable stress,” Bernanke said. The Fed Chairman explained that pressures in short-term bank funding markets have increased again and many lenders are reluctant to provide credit to counterparties. Moreover, credit availability is restricted because some large financial institutions have reported substantial losses and writedowns thereby reducing their available capital.
Developments in the financial markets have weighed in on real economic activity, Bernanke told the Committee continuing the trend of weak sales of new and existing homes and the cumulative decline in starts of single family homes. He also explained that real disposable income has only increased one percent over the last year reflecting weaker employment conditions and higher prices for energy and food. Bernanke expects the real gross domestic product (GDP) to not grow much and inflation to moderate in the coming quarters.
To address the current economic condition, Bernanke reiterated the value of the Fed’s longstanding discount window and its three new facilities for lending to depository institutions and primary dealers. In addition, the Chairman commented on the Bear Stearns buyout stating that the news “raised difficult questions of public policy. Normally, the market sorts out which companies survive and which fail, and that is as it should be.” He went on further to say that “given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain.” With consultation from the U.S. Treasury and the Fed, JPChase recently bought Bear Stearns.
In response to the weakening economy, the Fed has lowered interest rates on several occasions, even as recent as March. The rate is currently at 2 ¼ percent, three percentage points below its level last summer. Bernanke is confident that the Fed’s monetary and fiscal policies will support a return to growth in the second half of this year and in 2009. “Clearly, the U.S. economy is going through a very difficult period. But among the great strengths of our economy is its ability to adapt and to respond to diverse challenges,” said Bernanke. “…I remain confident in our economy’s long-term prospects.”
To view Bernanke’s full testimony, follow this link to the Fed’s Web site.
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