Bernanke: Economy could grow soon

Fed chief thinks there is a good chance for the economy to return to growth in near-term -- but the recovery could be slow due to continued high unemployment.

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By Chris Isidore, CNNMoney.com senior writer

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When do you think the economy will improve?
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  • It's already on the mend

NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke said that the U.S. economy is about to start growing again, although he cautioned it will be a slow recovery with continued high unemployment in the near term.

Speaking at an annual symposium in Jackson Hole, Wy., Bernanke echoed a statement made by the Fed earlier this month, saying that "economic activity appears to be leveling out, both in the United States and abroad."

Bernanke went a step further though, indicating that "prospects for a return to growth in the near term appear good."

But the central bank chief warned that problems remain in financial markets around the globe, and that with banks facing "substantial" additional losses ahead, businesses and consumers will continue to have trouble accessing credit.

"Because of these and other factors, the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels," he cautioned.

Fed watchers said they were not surprised by Bernanke's somewhat cautious outlook. They said the Fed chairman doesn't want to be pushed into raising interest rates or pulling back on other stimulus the Fed has pumped into the economy over the past year.

"The challenge he has now is that if he times the exit strategy too early, you risk a new recession a year or more from now." said Lakshman Achuthan, managing director of Economic Cycle Research Institute.

But Sung Won Sohn, economics professor at Cal State University Channel Islands, said he doesn't believe that Bernanke is playing an expectation game.

Sohn thinks Bernanke is truly worried about a weak recovery, despite some forecasts of strong gains ahead. He said the Fed chairman is right to be concerned since consumers have yet to really resume spending.

"You need consumers to go on a spending spree. Even if they wanted to, they can't because they can't get the credit,"

But Sohn said there is a risk in Bernanke being too cautious in talking about a recovery because it can become a self-fulfilling prophecy.

"Clearly business people would think twice about hiring people based on his view the recovery will be sluggish," he said.

Still, investors chose to focus on the positive part of his outlook. Stocks moved higher as Bernanke's remarks, along with a stronger than expected home sales report, fueled even more hopes that the economy has hit bottom. The Dow Jones industrial average was up more than 140 points in late-morning trading.

Defending the bailouts

Bernanke spent much of the speech reviewing the economic crisis that unfolded last September in the wake of the bankruptcy of Lehman Brothers and near collapse of insurer AIG (AIG, Fortune 500).

He defended the actions of the Fed, Treasury Department and Congress, as well as major governments around the world, in their response to the crisis. He said those actions likely prevented the financial panic from plunging the world into a far more serious economic downturn, possibly even a depression.

"Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk," he said.

He said the meltdown proved that there was the need for a new financial regulatory framework. But he cautioned that no matter what rules are put in place, the kind of intervention practiced by the Fed and other central banks may be necessary again at some point in the future.

"In a sufficiently severe panic, funding problems will almost certainly arise and are likely to spread in unexpected ways," he said. "Only central banks are well positioned to offset the ensuing sharp decline in liquidity and credit provision by the private sector. They must be prepared to do so." To top of page

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