Bernanke: 'Fundamentally Optimistic' About Economy

By BRIAN BLACKSTONE
WASHINGTON -- Federal Reserve Chairman Ben Bernanke on Tuesday offered some hope that the 16-month-old recession may be losing some of its severity and he is "fundamentally optimistic" about the economy's longer term prospects.

"Recently we have seen tentative signs that the sharp decline in economic activity may be slowing," Mr. Bernanke said in remarks prepared for delivery later Tuesday in Atlanta.

He specifically cited recent figures on housing, consumer spending, and new vehicle sales as some of those signs that the recession is slowing.

"A leveling out of economic activity is the first step toward recovery," Mr. Bernanke said.

"Today's economic conditions are difficult, but the foundations of our economy are strong, and we face no problems that cannot be overcome with insight, patience, and persistence, "he said. (See the full text of Bernanke's prepared remarks.)

Excerpts of Mr. Bernanke's speech to students at Morehouse College were released in USA Today.

Mr. Bernanke also stressed that despite the extraordinary efforts the Fed is taking to support financial markets and the economy, it hasn't taken its eye off of inflation. The Fed "treats its obligation to ensure price stability extremely seriously," Mr. Bernanke said.

Price stability doesn't necessarily mean that inflation is zero, and Mr. Bernanke noted that most Fed officials would like to see annual inflation of around 2% over the long term. "Right now, because of the weakness in economic conditions here and around the world, inflation has been running less than that, and our best forecast is that inflation will remain quite low for some time."

Still he warned that as the economy strengthens, financial markets heal and the demand for goods and services rebounds, liquidity the Fed has pumped into the system could pose an inflationary threat unless key interest rates rise and some liquidity is drawn back out of the system.

Mr. Bernanke signaled that officials are mindful of the need for an exit strategy once the economy improves. Fed officials, he said, "are fully committed to acting as needed to withdraw on a timely basis the extraordinary support now being provided to the economy and we are confident in our ability to do so."

Mr. Bernanke expressed confidence in the Fed's ability to promote economic stability through a variety of efforts including credit programs and open market securities purchases, saying "the Fed's toolkit remains potent, even though the federal funds rate is close to zero and thus cannot be reduced further."

He again defended the federal government's decision to rescue American International Group Inc., saying "preventing the failure of AIG was the best of the very bad options available." He acknowledged that many Americans see the AIG rescue as unfair because other companies, including nonfinancial and smaller financial firms, haven't been treated in the same manner. "Allowing AIG to at least partly avoid the discipline of the marketplace also sets a bad precedent," he said.