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WASHINGTON — The chairman of the Federal Reserve, Ben S. Bernanke, said on Tuesday that the economy appeared to be stabilizing on many fronts but cautioned that a recovery was still months away and that “further sizable job losses” will continue even after an upturn begins.
“We continue to expect economic activity to bottom out, then to turn up later this year,” Mr. Bernanke told the congressional Joint Economic Committee, according to his prepared remarks.
“Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while,” he predicted. “We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly.”
Notwithstanding his caveats, the Fed chairman gave his most upbeat assessment since the United States fell into its most severe financial crisis since the Depression and its steepest recession since at least the early 1980s.
He noted that consumer spending, which sank sharply the second half of 2008, actually grew in the first quarter of this year. Sales of existing homes have been “fairly stable” since late last year, in part because plunging home prices have made houses more affordable and interest rates on some fixed-rate mortgages have fallen below 5 percent.
Mr. Bernanke said conditions in credit markets have revived slightly in recent weeks. Homeowners are refinancing mortgages at a rapid clip, and financial institutions have stepped up their sale of securities backed by of credit card loans, automobile debt and student loans.
At the same time, the Fed chairman made it clear that the recession is not yet over and that many people will experience harder times in the months ahead. The nation has already lost five million jobs since the recession began more than one year ago, and unemployment usually continues to climb for many months after economic growth begins.
Mr. Bernanke noted that business investment was still “extremely weak,” which means that businesses are still contracting and will continue to shed workers. The unemployment rate hit 8.5 percent in March, and the Labor Department is expected to report on Friday that the jobless rate jumped sharply again in April.
Though Mr. Bernanke stopped short of saying the financial crisis is ending, he said the government’s much-criticized program to bail out banks and Wall Street firms had helped avoid a complete collapse. “I think we are in far better shape than we were in September and October,” he said.
The Fed chairman suggested that many of the nation’s 19 biggest banks will be instructed to raise additional capital when the Fed announces the results of “stress tests” on Thursday, and he tacitly acknowledged that the federal government will become a bigger shareholder in at least some of those institutions.
The tests are designed to determine whether the banks would have enough capital if the economic downturn is worse than expected. The banks have six months to raise that capital from private investors, but will have to take government money in exchange for shares of common stock if private money is unavailable.
“Following the announcement of the results, bank holding companies will be required to develop comprehensive capital plans,” Mr. Bernanke said, without specifying an exact number. Asked if he expected banks to raise the “majority” of the required capital from private sources, Mr. Bernanke predicted only that the amount could be “significant.”
Mr. Bernanke came under sharp criticism for his decision against immediately stopping credit card companies from abruptly doubling or tripling their interest rates to consumers, often for people who have remained current on all their payments.
The Fed is preparing new protections for credit card customers, but it will not impose them until much later this year. Senator Charles E. Schumer, Democrat of New York, said he had asked Mr. Bernanke to use the Fed’s emergency powers to act immediately but that the Fed chairman refused to do so.
“The Federal Reserve’s failure to protect consumers from these outrageous rate increases is unconscionable,” Mr. Schumer said. Noting that the Fed had swiftly used its emergency powers to rescue “teetering financial institutions,” he attacked the Fed chairman for refusing to act more quickly to protect credit card customers.
“What about the the family that has a $10,000 balance and had its rate jump from 7 to 23 percent?” Mr. Bernanke said he was “very concerned” about such practices, but said that cutting short the normal process for approving new regulations might simply provoke banks to raise their rates even more quickly or to cut many customers off entirely.
“It’s a quandary,” he told Mr. Schumer.
“I’m very frustrated,” the senator responded. “You could have figured out a better way than the one you have chosen.”
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