Federal Reserve Chairman Ben S. Bernanke said government efforts to calm financial markets and stem the credit crisis probably won't result in an immediate economic rebound.
``Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,'' Bernanke said today in a speech to the Economic Club of New York. ``Economic activity will fall short of potential for a time.''
The U.S. is showing increasing signs of falling into a recession, according to economists surveyed by Bloomberg News. Retail sales dropped in their longest slump in at least 16 years and prices paid to U.S. producers fell in September.
Bernanke, answering audience questions, said the growing concentration of financial institutions is ``a concern,'' noting the importance of ensuring a ``diverse'' banking industry. The U.S. also has a severe ``too big to fail problem,'' in which the insolvency of a large financial institution threatens to cause a market collapse. Policy makers also should ``look very hard'' at how to minimize the creation of asset bubbles that damage the economy and financial system when they burst.
The economy shrank at a 0.2 percent annual pace in the third quarter, and will contract 0.8 percent in the last three months of the year, according to the median estimate of economists surveyed earlier this month. U.S. gross domestic product will expand by just 1.2 percent next year as the collapse of the housing market, rising unemployment and constrained credit cause consumers and businesses to curtail spending.
`Primary Source'
``The housing market continues to be a primary source of weakness in the real economy as well as in the financial markets, and we have seen marked slowdowns in consumer spending, business investment and the labor market,'' Bernanke said. ``Credit markets will take some time to unfreeze.''
Bernanke has pushed the limits of the Fed's authority to create several unprecedented lending channels. Still, damage from the credit crisis has spread from mortgage lenders, commercial banks, securities firms and the biggest U.S. insurer to companies involved in manufacturing and services.
The bankruptcy of Lehman Brothers Holdings Inc. on Sept. 15 increased fears among investors that their short-term loans might not be repaid. Short-term money market rates, such as the market for short-term dollar loans known as Libor, or the London interbank offered rate, soared. The Libor rate stood at 4.55 percent today.
Lehman Failure
The Lehman failure was so disruptive that the central bank decided to protect creditors against a similar collapse of American International Group Inc. The firm accepted an emergency $85 billion loan from the Fed on Sept. 16.
``Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable setbacks,'' Bernanke said. ``We will not stand down until we have achieved our goals of repairing and reforming our financial system.''
U.S. central bankers have used some five new programs, many erected under emergency powers, to pump billions in temporary dollar loans into a financial system where many banks have curtailed overnight lending out of concern they won't be paid back.
``Ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning,'' Bernanke said.
The Federal Open Market Committee voted to cut the benchmark lending rate a half point to 1.5 percent on Oct. 8 in a move coordinated with five other central banks.
Consider Rate Changes
Federal funds futures traders are betting on a 70 percent probability of a quarter-point cut when policy makers meet to consider changes to their benchmark lending rate on Oct. 28-29. The FOMC has cut the rate 3.75 percentage points over 13 months.
Non-farm payrolls have declined for nine consecutive months, pushing the unemployment rate to 6.1 percent in September. Sales at U.S. retailers dropped 1.2 percent in September, the most in three years.
U.S. regulators this week announced a sweeping plan to jump- start lending. The Treasury committed $250 billion in taxpayer funds to private banks, the Federal Deposit Insurance Corp. extended its insurance to include bank creditors and the New York Fed provided details on a backstop for the $1.5 trillion commercial paper market.
In the first part of his speech, Bernanke explains why rapid and aggressive government intervention is necessary to stem financial panics. In previous crises, government engagement came too late and many lenders were too badly damaged.
``Americans can be confident that every resource is being brought to bear to address the current crisis,'' Bernanke said. ``We now have the tools we need to respond.''
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