Ben Bernanke, the chairman of the US Federal Reserve, held out the tentative hope yesterday that the severe recession in the United States might be brought to an end before the end of this year on condition that the correct steps are taken over the coming days and weeks to restore financial stability and to shore up teetering banks.
His semi-annual presentation to the Senate Banking Committee, followed by questions and answers, was nonetheless the most sober of his tenure so far as head of the US central bank as the country continues to grapple with a severe economic contraction as well as tumbling stock indices and continuing anxiety about the stability of the banks. Yet his appearance seemed to go some way to calming investors, with the benchmark Dow Jones index closing 3.3 per cent higher at 7,350.9 – this even as the independent Conference Board revealed that its latest consumer confidence index for February was the lowest recorded in history at just 25.
Part of the market rally, which almost erased Monday's losses, was spurred by remarks from Mr Bernanke indicating that bank nationalisations were not at hand. "We don't need majority ownership to work with the banks," he said. "We can work with them now to do whatever is necessary to get rid of bad assets. I don't see any reason to destroy the franchise value. It just isn't necessary."
Grilled by senators, including the committee's chairman, Chris Dodd, over what was being done to contain the crisis, Mr Bernanke acknowledged that in the short-term multiple risks remained, including the additional impact of the slowdown globally on prospects for recovery at home as well as the mutually reinforcing cycle of weak growth and financial market strain – a dynamic, he said, that still needed to be interrupted.
"To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilise financial institutions and financial markets," he told the committee. And he himself seemed at pains to use his appearance to offer a glimpse of light going forward.
"If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability – and only if that is the case, in my view – there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery," he said.
He came to the Hill at a time when numerous policy initiatives are in hand, including the nearly $800bn (£555m) stimulus bill and the plans now being developed by the Treasury Secretary, Timothy Geithner, to underpin the largest of the struggling banks. The Fed chairman was quizzed about the "stress tests" that regulators, including the Fed, will be doing to determine just how fragile the banks are. "The purpose of these assessments... is to make sure banks have enough capital, not only to be well capitalised in what we expect to be the weak conditions that we will see in the next year but even under conditions that are weaker than expected," he said.