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MARKETWATCH FIRST TAKE

FOMC's forecast for recovery is very rosy

Commentary: Growth expected, but Bernanke still worried about depression

By MarketWatch

Last update: 10:23 a.m. EST Feb. 24, 2009

Comments: 263

WASHINGTON (MarketWatch) -- Ben Bernanke, the chairman of the Federal Open Market Committee, seems to be at odds with his colleagues about how strong the economic recovery may be next year.

The official FOMC forecast calls for healthy growth next year and robust growth in 2011, but the chairman of the Federal Reserve has his doubts that a depression can be averted.

In his semiannual testimony on Wednesday to the Senate Banking Committee, Bernanke stressed the depth of the economic crisis and the fragile nature of consumer and business confidence, despite the desperate measures that the president, the Congress, the Fed and the Treasury have taken. See full story.

After noting incremental progress in credit markets since September's narrowly averted meltdown, Bernanke warned that "significant stresses persist in many markets."

And he repeated what the FOMC said after its last meeting: "Economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time." The fed funds target has been set as close to zero as possible.

Bernanke expressed hope the Troubled Asset Relief Program and Troubled Asset-backed Security Lending Facility, and all other programs over time, "should further stabilize our financial institutions and markets, improving confidence and helping to restore the flow of credit needed to promote economic recovery."

If everything goes right, if the government's actions are successful in restoring stability -- "and only if that is the case, in my view" Bernanke said, "there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery."

But the chairman warned that a lot could still go wrong. "The downside risks probably outweigh those on the upside," he said, pointing to the global nature of the downturn and to the possibility of "the destructive power of the so-called adverse feedback loop, in which worsening economic and financial conditions become mutually reinforcing."

There is no official definition of a depression, but that is as close as any: An economy that is not self-healing but is instead self-destructing.

The FOMC may be predicting 2.5% growth in 2010 and up to 5% growth in 2011, but the chairman is still worried about a depression. A recovery may be the most likely outcome, but it is not the only possibility.

-- Rex Nutting, Washington bureau chief
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It may not be a good idea to trust the federal government's projections.