MercoPress. South Atlantic News Agency

Upbeat message from Bernanke but colleagues talk of recession

The chairman of the US Federal Reserve said on Wednesday the US economy will eventually emerge from the financial crisis with “renewed vigour”, but warns it will not happen quickly.

"The crisis will end when comprehensive responses by political and financial leaders restore that trust, bringing investors back into the market and allowing the normal business of extending credit to households and businesses to resume" said Bernanke who pledged the Fed would continue to act aggressively to fight the crisis. "By restricting flows of credit to households, businesses, and state and local governments, the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth" Bernanke told the Economic Club of New York. "We will continue to use all the tools at our disposal to improve market functioning and liquidity," he said, adding that policy-makers' aggressive and quick response crucially distinguished this episode from the crisis of the 1930s. US stocks, already down sharply on Wednesday on news of an unexpectedly big drop in September retail sales and weak factory data, sold off even more after the Fed chairman's dour assessment and finished the day with their largest percentage losses since the 1987 crash. St. Louis Federal Reserve Bank President James Bullard said the sharp 1.2% drop in retail sales increased the risk of recession. "The third quarter, I think, will be flat to slightly negative," he told reporters in Little Rock, Arkansas. "That is going to push up the probability that it will later be named a recession". But Janet Yellen, president of the San Francisco Federal Reserve and a close confidante of Bernanke actually became the first senior Fed member to use the "r word" in relation to the current economic downturn during a speech in Silicon Valley, California. Ms Yellen, who in the past has sat on the Fed's powerful interest-rate setting committee, said: "Indeed, the US economy appears to be in a recession. This is not a controversial view". The data contributed to expectations that Fed officials will follow up the emergency interest rate cut made last week with another reduction at their scheduled next meeting on Oct. 28-29. The Fed report prepared for the central bank's next meeting added to the gloomy news about the economy. The Beige Book said economic activity had weakened across the country in recent weeks as businesses revisited capital investment plans, consumers curtailed spending and labor markets softened. The Fed described business contacts as "pessimistic." In his speech Bernanke emphasized the housing sector remained the economy's weakest spot, but he also cited "marked slowdowns" in consumer spending, business investment and the labor market. He added that credit markets would take time to unfreeze and said export sales, until recently a bright spot, were likely to slow as well. While inflation had been high recently, Bernanke said expectations of future inflation had held steady or eased, import prices were moderating and commodity prices had fallen. Those factors, along with the softness in the economy, "should lead to rates of inflation more consistent with price stability," he said. "I think the evidence is now in that the inflation problems are moderating and look to be returning to price stability at a reasonable pace".