May 5 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke warned that another shock to the financial system would undercut the central bank’s forecast that the U.S. recession will give way this year to a slow recovery.
“A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall,” Bernanke said today in testimony to the congressional Joint Economic Committee. He highlighted that the economic contraction may be slowing and that the housing market has “shown some signs of bottoming” after a three-year slump.
The Fed chief gave no indication the Fed intends to retreat from its unprecedented policy of keeping the main interest rate close to zero and boosting credit through emergency-loan programs and asset purchases. His remarks echo last week’s Fed statement that, while the outlook has “improved modestly” since March, the economy may “remain weak for a time.”
Bernanke also said the Fed will soon provide on its Web site more information on its lending programs. That includes the number of borrowers, concentration of credit among borrowers, ratings of collateral and some details on contracts with private firms. The central bank will “continue to expand the range of information” it publishes, he said.
The effort at greater transparency is in response to an April 2 nonbinding budget amendment sponsored by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and the panel’s ranking Republican, Alabama Senator Richard Shelby, Bernanke said. That proposal passed 96-2.
Tougher Measure
The Fed chief did not mention a tougher measure, also nonbinding, sponsored by Vermont Senator Bernard Sanders, an independent, that called on the Fed to identify borrowers. The measure passed 59-39 on the same day.
Bernanke, who spoke two days before the planned release by the Fed and other U.S. regulators of the results from stress tests on the country’s 19 largest banks, gave no hint of the results. He said in prepared remarks in Washington that banks “will be required to develop comprehensive capital plans” and that funds from the government “will be available as needed.”
The lenders get their assessments from officials today, according to people familiar with the matter. About 10 of the banks will need additional capital to protect against a deeper recession, they said. Bank of America Corp. and Citigroup Inc. are among those requiring a bigger buffer, people familiar with the issue have said.
Emergency Credit
The remarks were Bernanke’s first comments since the Fed’s Open Market Committee decided last week to refrain from expanding emergency credit programs amid signs the recession is easing.
“Readings from the credit default swap market and other indicators show that substantial concerns about the banking industry remain,” Bernanke said.
Economic figures in the past two weeks have shown smaller declines in house prices and stabilization in sales, a jump in consumer confidence and the smallest contraction in manufacturing in seven months.
“Recent data also suggest that the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, may be stabilizing,” Bernanke said.
Still, economists anticipate the job market will keep deteriorating after the sharpest contraction in gross domestic product in half a century.
Jobs Eliminated
Employers probably eliminated 610,000 jobs last month, with the unemployment rate rising 0.4 percentage points to 8.9 percent, based on the median estimates of analysts surveyed by Bloomberg News. The Labor Department’s report is scheduled for May 8.
“The most recent information on the labor market -- the number of new and continuing claims for unemployment insurance through late April -- suggests that we are likely to see further sizable job losses and increased unemployment in coming months,” Bernanke said today.
Last week, the Commerce Department reported the U.S. economy contracted at a 6.1 percent annual pace in the first quarter, reflecting declines in housing and a record slump in inventories. The economy shrank at a 6.3 percent annual rate in the last three months of 2008.
The housing market is showing signs of improvement after the Fed’s purchases of mortgage securities helped drive down home-loan rates to the lowest level in decades.
Double Purchases
Bernanke and his colleagues moved in March to double purchases of housing debt to $1.45 trillion, and also to start buying $300 billion of long-term Treasuries.
“The supply of mortgage credit is still relatively tight, and mortgage activity remains heavily dependent on the support of government programs or the government-sponsored enterprises,” Bernanke said.
Financial markets have also recovered in recent weeks. The Standard & Poor’s 500 Stock Index climbed to its highest level in four months yesterday. The London interbank offered rate that banks charge for three-month dollar loans today fell below 1 percent for the first time. The Libor-OIS spread, a gauge of banks’ reluctance to lend, reached its narrowest since Sept. 1.
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