Bernanke cautiously optimistic on growth

The global economy seems about to start to grow again, Ben Bernanke said on Friday, declaring that vigorous actions by the world’s central banks and governments had succeeded in averting economic catastrophe.

“Prospects for a return to growth in the near term appear good,” the Federal Reserve chairman told told central bankers at their annual retreat in Jackson Hole, Wyoming.

However, European Central Bank president Jean-Claude Trichet said at the same symposium that talk of economic conditions’ returning to normal made him “a little bit uneasy”.

“Because we have some green shoots here and there, we are already saying: ‘Well, after all, we are close to back to normal,’” he said. “We know that we have an enormous amount of work to do and we should be as active as possible.”

His comments were echoed by Stanley Fischer, governor of the Bank of Israel, who said: “We may be relaxing too soon, thinking the crisis is past when that is far from sure.”

Mr Bernanke said that economic activity appeared “to be levelling out both in the US and abroad”. But while Mr Bernanke said “we have avoided the worst”, he stopped short of declaring the crisis over.

In spite of “noteworthy progress, critical challenges remain” he said. He added: “Economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels.

“Strains persist in many financial markets across the globe, financial institutions face significant additional losses and many businesses and households continue to experience considerable difficulty getting access to credit.”

Mr Bernanke’s comments about a return to growth “in the near term” left open the possibility that growth could sag again after picking up in the second half of this year.

But the overall thrust of the remarks suggests Mr Bernanke is reasonably confident that a recovery process is in train, even if it proves to be a bumpy and protracted one.

The Fed chairman, whose current term expires soon amid uncertainty over his prospects for reappointment, gave a forceful defence of his activist approach to fighting the crisis.

These policies, including large-scale asset purchases and loans for non-bank financial firms, have come under fire from critics including in Congress.

Mr Bernanke asserted that vigorous policy actions by the Fed, the US government and their counterparts around the world over the past year had warded off economic disaster.

“As severe as the economic impact has been …the outcome could have been decidedly worse,” he said. “Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year monetary, fiscal and financial policies around the world have been aggressive and complementary.”

These “speedy and forceful actions” prevented a global recession that could have been “extraordinarily deep and protracted”, he said.

Mr Bernanke defended the Fed’s extraordinary actions, saying this was an appropriate response to a crisis – particularly last autumn – that had many features of a “classic panic.”

In such circumstances it was the traditional job of central banks to provide liquidity against fundamentally sound collateral, he argued. Mr Bernanke said the use of Fed liquidity facilities “has declined sharply since the beginning of the year – a clear market signal that liquidity pressures are easing and market conditions are normalising.”

The Fed chairman said central bankers would have to work to support the nascent recovery and help construct a new system of financial regulation that would minimise the risk of a repetiton of the crisis.

He said the authorities would need to acquire new macroprudential or systemic risk powers to curtail risk taking and would have to toughen liquidity requirements imposed on financial firms.

Financial markets reacted positively to his remarks and the S&P 500 index closed up 1.9 per cent to 1,026.13 – a 10-month high.