No quick fix for U.S. economy, top officials say
Last Updated: Wednesday, October 15, 2008 | 2:05 PM ET
CBC News
Federal Reserve chairman Ben Bernanke speaks at the Economic Club of New York on Wednesday. Behind him is Maria Bartiromo, a financial reporter for CNBC. (Mark Lennihan/Associated Press)The U.S. economy won't bounce back quickly even if confidence in the financial system returns and jittery markets finally calm down, U.S. Federal Reserve chairman Ben Bernanke said Wednesday.
"Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away," Bernanke told the Economic Club of New York.
President George W. Bush reinforced the message in Washington, saying that the economy will recover "in the long run."
And Treasury Secretary Henry Paulson told a TV interviewer that "this will take time. There will be challenges."
Bernanke said that despite all the extraordinary measures taken around the world by central banks and governments — interest-rate cuts, bank bailout packages and the provision of billions in liquidity — "credit markets will take some time to unfreeze."
Because banks are reluctant to lend to other banks, consumers or companies out of fear they won't be repaid, the economy is freezing up. The steps taken by governments and central banks are intended to get banks lending again.
But with the stimulus taking time to work, Bernanke warned that the economy could "fall short of potential for a time."
Risks reduced
The U.S. government's new powers under the $700-billion bailout package signed into law two weeks ago should help reduce risks to the economy, he said.
Tapping that new authority, the Treasury Department announced Tuesday it will invest up to $250 billion in U.S. banks in return for partial ownership. It is hoped that banks will use the cash infusion to rebuild their reserves and lend money more freely.
"We now have the tools we need to respond with the necessary force to these challenges," Bernanke said. Still, he cautioned: "I am not suggesting the way forward will be easy."
Bernanke didn't offer any fresh clues about the Fed's next move on interest rates, but he did indicate the central bank's concerns about inflation were diminishing.
He said expected inflation has held steady or eased, import prices are moderating and commodity prices have fallen. These factors, along with the softness in the economy, "should lead to rates of inflation more consistent with price stability."
U.S. apparently in recession, official says
In a speech Tuesday, Janet Yellen, CEO of the Federal Reserve Bank of San Francisco, said the U.S. economy already "appears to be in a recession."
"This is not a controversial view, since the latest Blue Chip consensus projects that there will be three consecutive quarters of contraction in real GDP, starting last quarter," she said.
Recent data suggest the economy was weaker than expected in the third quarter, probably showing essentially no growth at all, Yellen said. Gross domestic product growth in the fourth quarter appears to be weaker yet, with an outright contraction quite likely, she added.
Yellen said turmoil in the financial markets has hit every major sector of the economy, with consumer spending declining, employment falling and household wealth dropping substantially due to sliding house prices and slumping stock markets.
With files from the Associated Press and Reuters
