Forecast: 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 near 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.

ISM Report

The chairman spoke as a private survey reinforced evidence the recession is easing. The Institute for Supply Management said its index of non-manufacturing businesses, which make up almost 90 percent of the economy, rose to 43.7, the highest level since October. Readings below 50 signal contraction.

Stocks declined after rising yesterday. The Standard & Poor’s 500 Index was down 0.38 percent at 903.8 in New York. Treasuries were little changed, with the benchmark 10-year note yields at 3.16 percent compared with 3.15 percent yesterday.

“We continue to expect economic activity to bottom out, then to turn up later this year,” Bernanke said today. “Key elements of this forecast are our assessments that the housing market is beginning to stabilize and that the sharp inventory liquidation that has been in progress will slow over the next few quarters.”

After the testimony, Bernanke met with the Senate Republican Policy Committee. Bernanke told the senators that the economy could grow around 2 percent next year and 4 percent in 2011, John Ensign of Nevada, who chairs the committee, said in a Bloomberg Television interview.

‘Exactly Right’

“But as Fed chairmen always say, there are a lot of underlying conditions that have to be exactly right,” Ensign said. “One of them is that we don’t have more problems in the financial markets, especially with the banks, and that’s a big assumption, and he actually said that’s a big assumption.”

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 little hint of the results to members of Congress. He said in Washington that banks “will be required to develop comprehensive capital plans” and that funds from the government “will be available as needed.”

Fed officials are “now satisfied” that the data accurately reflect banks’ financial conditions after discussions with the firms to review and “not negotiate” initial results, he said.

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.

‘Government Capital’

The issue is to “find ways to get firms out of a situation where they’re dependent on government capital, and we are hopeful that that can be done over the next few years,” Bernanke said in response to questions from Representative Elijah Cummings, a Maryland Democrat.

“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.

Still, economists anticipate the job market will keep deteriorating after the sharpest contraction in gross domestic product in half a century. Employers probably eliminated 610,000 jobs last month, with the unemployment rate rising to 8.9 percent, based on the median estimates in Bloomberg News surveys. The Labor Department’s report is scheduled for May 8.

Job Losses

“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.

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.

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.

Libor Rate

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.

The Fed’s effort at greater transparency in its emergency lending programs is a 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.

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.

Sanders, in a statement after the hearing, threatened to pass the measure again “in a stronger form” if Bernanke failed to accept it. Bernanke told Sanders in February that identifying borrowers would be “counterproductive” and result in “severe adverse consequences for the economy.”

“Mr. Bernanke should not pick and choose which amendments he wants to respond to,” Sanders said. “My bipartisan amendment passed the Senate by 20 votes, and we expect him to respect it.”