WASHINGTON (CN) – Chairman Ben Bernanke of the Federal Reserve predicted Wednesday that the economy will turn upwards this year, but that the nation will have to wait until next year for employment to stop its dive. The “recovery will only gradually gain momentum,” he told the House Budget Committee.
“Activity in the housing market, after a long period of decline, has also shown some signs of bottoming,” said Bernanke, in his example showing the end of the market’s plummet.
During his testimony Bernanke also discussed the role of the nation’s growing debt combined with a greater number of Americans depending on Medicare and Social Security as the building blocks for a financial crisis.
Since the beginning of 2008, he said, the nation suffered a “loss of nearly 6 million jobs.” He emphasized the continuing rate of loss, saying that “sizable job losses are likely over the next few months,” and predicted they will continue into next year.
But any recovery in employment will come after a recovery of the financial markets, he said. And the markets “have improved since earlier this year.”
He found cause for optimism in the stability of consumer spending, which he said has been level since the beginning of the year, and in the health of the banks.
In what was commonly known as the bank stress test, it was determined last month that 10 of the largest American banks needed to collectively raise $75 billion by November. Bernanke said that the banks have already raised $35 billion.
He also brought up a report by the Congressional Budget Office that determined that the American Recovery and Reinvestment Act could boost the level of real gross domestic product by one to three percent and increase employment by one million to 3.5 million jobs by the end of the year.
Nonetheless, “inflation will remain low,” he said.
Bernanke expressed concerns about the fiscal future of the United States, saying that the government needs to come up with a good economic plan. If the national debt becomes too big, the interest payments could become unmanageable, at which point the debt would explode.
The Obama administration projected a $1.8 trillion deficit this fiscal year and by 2011, the deficit is predicted to be 70 percent of the national GDP, up from 40 percent before the onset of the financial crisis.
The ratio of debt to GDP, Bernanke said, will be the highest since the early 1950’s, after the massive credit buildup during World War II.
With this already elevated debt, he said, the United States would need to stop borrowing, but he pointed to the entitlement programs such as Social Security, which will he said will grow extensively within the next five or ten years.
He called it a “double challenge,” where the nation must restore a balanced fiscal system, but also feed the demands of the retiring Baby Boomers.
“Tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues,” he said. Bernanke added somewhat ominously that part of a federal financial plan should determine how to deal with the failure of major financial institutions.