November 15 KAZI Book Review Features Author of TOO BIG TO SAVE?: How to Fix the U.S. Financial System

Robert Pozen, author of  TOO BIG TO SAVE?: How to Fix the U.S. Financial System is the November 15 guest on KAZI Book Review on KAZI 88.7 FM, 12:30 p.m. – 1p.m. You can listen to the interview live on the web at http://www.live365.com/profiles/kazifm.

Widely recognized for his leadership in both finance and economic policy, Pozen takes federal policymakers to task for spending huge sums of money with too few benefits for America’s taxpayers. Instead, he urges our government to rein in its bailouts, stop buying toxic assets, and provide more incentives for the private sector to regulate itself.  Pozen argues that:   

• The key to our economy’s recovery is the revival of loan securitization
• Broad-based legislative restrictions on executive compensation tend to backfire
• Fair value accounting did not cause the financial crisis and should mostly be retained
•  International cooperation won’t do much to prevent future financial crises
• Regulatory gaps should be closed without creating omnibus agencies

Within a sweeping analysis, TOO BIG TO SAVE? chronicles the collapse of our financial system, one domino at a time from mortgage-backed securities to stock markets, from money market funds to recapitalized banks, and from the SEC’s mistakes to international protectionism. Pozen then suggests how the securitization process should be reformed, assesses the impact of the financial crisis on the stock and bond markets, and evaluates the federal bailout of financial institutions by buying their stock and toxic assets.

Robert Pozen

 Pozen is Chairman of MFS Investment Management, which manages over $150 billion in assets for more than five million investors worldwide.  He was formerly vice chairman of Fidelity Investments and president of Fidelity

Management & Research Company, the investment advisor to the Fidelity mutual funds.  He served on President Bush’s Commission to Strengthen Social Security and as Secretary of Economic Affairs for Massachusetts Governor Mitt Romney.  He is a senior lecturer at Harvard Business School and has contributed numerous articles to the Wall Street Journal, the New York Times, and the Financial Times.

Legislation Unveiled to Reform U.S. Financial System

Senate Banking Committee Chairman Chris Dodd (D-CT) joined by fellow committee members Jack Reed (D-RI), Charles E. Schumer (D-NY), Robert Menendez (D-NJ), Daniel K. Akaka (D-HI), Jon Tester (D-MT), Mark Warner (D-VA), Jeff Merkley (D-OR) and Michael Bennet (D-CO) unveiled a bill today to reform the way that our financial system is regulated.  Enclosed below is a summary of the highlights of the bill provided by the press office of the Senate Banking Committee.

Senator Christopher Dodd

Summary: Restoring American Financial Stability – Discussion Draft

HIGHLIGHTS OF THE DISCUSSION DRAFT

Consumer Financial Protection Agency: Creates an independent watchdog to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, while prohibiting hidden fees, abusive terms, and deceptive practices.

Ends Too Big to Fail: Prevents excessively large or complex financial companies from bringing down the economy by: creating a safe way to shut them down if they fail; imposing tough new capital and leverage requirements and requiring they write their own “funeral plans”; requiring industry to provide their own capital injections; updating the Fed’s lender of last resort authority to allow system-wide support but not prop up individual institutions; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.

Protects Against Systemic Risks: Creates an independent agency with a board of regulators to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the financial system. The agency could require companies that threaten the economy to divest some of their holdings.

Single Federal Bank Regulator: Eliminates the convoluted system of multiple federal bank regulators to increase accountability and end unnecessary overlap, conflicting regulation, and “charter shopping;” keeps in place the healthy dual banking system that governs community banks.

Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation and director nominations.

Closes Loopholes in Regulation: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated – including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders.

Protects Investors: Provides tough new rules for transparency and accountability from investment advisors, financial brokers and credit rating agencies to protect investors and businesses.

Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefit special interests at the expense of American families and businesses.

For more information on the proposed legislation click here.

African American Unemployment Continues to Rise

Despite news of an improving economic picture for the nation, national unemployment continued at historic highs coming in at 15.7 percent for African Americans, 13.1 percent for Hispanics, and overall unemployment of 10.2 percent for the month of October according to the U.S. Bureau of Labor Statistics monthly update on employment.

The 15.7 unemployment rate for African Americans was the highest since August 1984 when it reached 16 percent.  The overall unemployment rate of 10.2 percent was the highest since April 1983 when it also was 10.2 percent.

African American male unemployment was 17.1 percent and African American female unemployment was 12.4 percent in October.

Industry Employment

Total nonfarm payroll employment declined by 190,000 in October. In the most recent 3 months, job losses have averaged 188,000 per month, compared with losses averaging 357,000 during the prior 3 months. In contrast, losses averaged 645,000 per month from November 2008 to April 2009. Since December 2007, payroll employment has fallen by 7.3 million.

Health care employment continued to increase in October (29,000). Since the start of the recession, health care has added 597,000 jobs.

Construction employment decreased by 62,000 in October. Monthly job losses have averaged 67,000 during the most recent 6 months, compared with an average decline of 117,000 during the prior 6 months. October job losses were concentrated in nonresidential specialty trade contractors (-30,000) and in heavy construction (-14,000). Since December 2007, employment in construction has fallen by 1.6 million.

Manufacturing continued to shed jobs (-61,000) in October, with losses in both durable and nondurable goods production. Over the past 4 months, job losses in manufacturing have averaged 51,000 per month, compared with an average monthly loss of 161,000 from October 2008 through June 2009. Manufacturing employment has fallen by 2.1 million since December 2007.

Retail trade lost 40,000 jobs in October. Employment declines were concentrated in sporting goods, hobby, book, and music stores (-16,000) and in department stores (-11,000). Employment in transportation and warehousing decreased by 18,000 in October.

Temporary help services has added 44,000 jobs since July, including 34,000 in October. From January 2008 through July 2009, temporary help services had lost an average of 44,000 jobs per month.

The average workweek for production and nonsupervisory workers on private nonfarm payrolls was unchanged at 33.0 hours in October. The manufacturing workweek rose by 0.1 hour to 40.0 hours, and factory overtime increased by 0.2 hour over the month.

In October, average hourly earnings of production and nonsupervisory workers on private nonfarm payrolls rose by 5 cents, or 0.3 percent, to $18.72. Over the past 12 months, average hourly earnings have risen by 2.4 percent, while average weekly earnings have risen by only 0.9 percent due to declines in the average workweek.

Economic and Job Trends Focus of November 2 Economic Perspectives

The state of the economy and job trends will be the focus of the November 2 Economic Perspectives’ interview with Brian Kelsey, Director of Community and Economic Development at the Capital Area Council of Governments (CAPCOG) on KAZI 88.7 FM.  Kelsey will discuss local, state, and federal trends in the economy, where job opportunities will be in the future, and racial disparities in unemployment.

Brian Kelsey

Kelsey has worked in economic development at the local, regional, and federal levels, focusing on research and data analysis. His work at CAPCOG involves tracking regional competitiveness issues and providing consulting services to cities, counties, and local economic and workforce development organizations.

Before joining CAPCOG in 2005, Brian worked for the Council on Competitiveness in Washington DC, where he co-authored a popular guidebook on regional economic development. Brian started his career in a local economic development fellowship program in Sonoma County, California.

Brian earned a master’s degree from the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin. His bachelor’s degree in economics and history is from the University of North Carolina at Chapel Hill, where graduated Phi Beta Kappa with highest distinction.

The Silent Depression: How are Minorities Faring in the Economic Downturn

On Wednesday, September 23, 2009 at 10:00 a.m., the House Oversight and Government Reform Committee held a hearing titled “The Silent Depression: How are Minorities Faring in the Economic Downturn.” The hearing examined the disparate effects of the current economic downturn on minority populations in the United States, with particular attention on the recent increases in unemployment and home foreclosures. Additionally, the hearing explored the effectiveness of Federal government initiatives in ensuring that minority populations are adequately included in the nation’s efforts toward economic recovery.  Enclosed below is an excerpt from the written testoimony provided by Marc Morial, President of the National Urban League.

The State of Africans Americans in Our National Economy

I do not say this to alarm or inflame.  I am just stating a plain fact based upon our experience that includes decades of service delivery and research.  We see it in the faces of the people who come to us for help each year.  We hear it in the voices of the men and women seeking jobs that just aren’t there.  We feel it in the pain of those who come to us for help in keeping a roof over their heads.

Marc Morial

And our direct experience is borne out by our empirical research.  Each year, the National Urban League publishes the Equality Index as part of our annual State of Black America report.  The Equality Index is an indicator of the relative status of blacks and whites in America.  It consists of five sub-indices: economics, education, health, social justice and civic engagement. Equality is indicated by an index of 100%, therefore an Equality Index less than 100% suggests that blacks are doing worse relative to whites, and an Equality Index greater than 100% suggests that blacks are doing better than whites. 

According to our 2009 Equality Index, African Americans are at about 71% compared with white Americans.  The Economic Index is 57.4%.

According to our 2009 State of Black America Report: nationally, the typical African-American family today possesses less than 10 percent of the net worth of the average white family; almost 30 percent of black families have zero or negative net worth; and far fewer blacks than whites benefit from inherited wealth or assets.

While this is but a snapshot, it paints a dire picture.  Among other things, it illustrates that African Americans just don’t have the cushion that protects us from economic catastrophe when an economy goes into freefall.  

We are starting to see some hopeful signs in other areas of the economy that indicate we may be turning course.  Of course, the job numbers are a lagging indicator, so we hope that they will begin to improve as other areas of the economy begin to point to recovery.

However, even if this is the case, it does not necessarily mean that the African American community will be out of the woods.  In fact, our long-term research indicates a troubling trend that must be proactively reversed.

Catching Up From the End of the Line

According to our State of Black America 2009, African Americans have been doing progressively worse in each economic expansions.  For example, median household income increased during the 1991 expansion, but declined in the 2001 expansion.  

During the first six years of the 1991-2001 recovery, real median income for African-American households grew by 15.6 percent while the real median income of white households grew by 8.9 percent.   Poverty rates declined by 19 percent and 8.5 percent, respectively.  For the duration of the 1992 expansion, real median household income grew by 23.6 percent for African Americans and by 13 percent for whites, while poverty rates declined by 30.6 percent and 17 percent, respectively.  

Although unemployment declined for both groups during each of the most recent expansions, the six-year decline for African Americans during the 1991-2001 expansion was nearly six times greater than the decline during the 2001-2007 expansion.  For whites, the magnitude of the difference was thirteen times.

Between 2001 and 2007, whites saw a net gain in the rate of homeownership (1.2 percent) while African Americans experienced a net loss (-1.0 percent)

To read the entire written testimony of Morial go to: http://groc.edgeboss.net/download/groc/fullcommittee/testimony-marcmorial.pdf.

To peruse all the written testimony provided at the haring go to http://oversight.house.gov/story.asp?ID=2604.

Strategies for Fostering Equitable Economic Growth in Central Texas Focus of October 12 Economic Perspectives

Ayleen Perez and Cloteal Haynes will discuss the PeopleFund Conference on Economic Opportunity on the October 12 edition of Economic Perspectives on KAZI 88.7 FM.  Perez is the communications and outreach manager of PeopleFund and Haynes is a long-time board member.  The Conference will be held October 24 at Austin Community College’s Eastview Campus.

Every year, the Conference unites community leaders, business owners, policy makers, developers, and artists to discuss the changes in the region and effective ways to further positive and equitable growth. From adult education and job opportunities to affordable housing options, the Conference addresses the key issues facing low- to moderate-income communities, and highlights strategies for creating opportunity for Central Texans. The program includes a regional and local economic snapshot, as well as breakout sessions addressing both community and business issues.

Ayleen Perez

Cloteal Haynes

The Conference will feature two keynote addresses.  The morning address will be delivered by Kenia Davalos, Los Angeles County Commissioner and Latino Business Advocate.  The afternoon keynote address will be delivered by President Obama’s newly appointed National Director of the U.S. Minority Business Development Agency, David Hinson.

PeopleFund provides affordable loans and counseling to ventures that create jobs, generate wealth, provide care for our children, and develop green technologies. It has invested over $20 million in underserved areas of Central Texas.

Ayleen Perez joined the PeopleFund staff in July 2009 as the Communications and Outreach Manager. In addition to community outreach and brand recognition, Ayleen’s responsibilities include planning and implementing public forums, such as our Conference on Economic Opportunity, that address critical economic needs in Central Texas. Born in Caracas, Venezuela but raised in Miami, Florida, Ayleen moved to Austin in November 2001 and has worked within the Latino community ever since.

Cloteal Haynes is managing partner of Hayes-Eaglin-Waters.  She has has over 30 years of planning and construction experience and has a masters degree from LBJ School of Public Affairs at The University of Texas at Austin.  Cloteal is a graduate of Leadership Austin and a board member of the Austin Black Contractors Association.

African American Unemployment Rises in September, Healthcare Job Gains Continue

African American unemployment grew from 15.1 percent in August to 15.4 percent in September according to the latest report of the U.S. Bureau of Labor Statistics. Overall unemployment was virtually unchanged increasing slightly from 9.7 percent in August to 9.8 percent in September.

Unemployment rates in September were 9.0 percent for whites and 12.7 percent for Hispanics. The unemployment rate for Asians was 7.4 percent, not seasonally adjusted.

Among the unemployed, the number of job losers and persons who completed temporary jobs rose by 603,000 to 10.4 million in September. The number of long-term unemployed (those jobless for 27 weeks and over) rose by 450,000 to 5.4 million. In September, 35.6 percent of unemployed persons were job-less for 27 weeks or more.

Industry Data

Employment in health care continued to increase in September (19,000), with the largest gain occurring in ambulatory health care services (15,000). Health care has added 559,000 jobs since the beginning of the recession, although the average monthly job gain thus far in 2009 (22,000) is down from the average monthly gain during 2008 (30,000).

In September, construction employment declined by 64,000. Monthly job losses averaged 66,000 from May through September, compared with an average of 117,000 per month from November to April. September job cuts were concentrated in the industry’s nonresidential components (-39,000) and in heavy construction (-12,000). Since December 2007, employment in construction has fallen by 1.5 million.

Employment in manufacturing fell by 51,000 in September. Over the past 3 months, job losses have averaged 53,000 per month, compared with an average monthly loss of 161,000 from October to June. Employment in manufacturing has contracted by 2.1 million since the onset of the recession.

In the service-providing sector, the number of jobs in retail trade fell by 39,000 in September. From April through September, retail employment has fallen by an average of 29,000 per month, compared with an average monthly loss of 68,000 for the prior 6-month period.

Government employment was down by 53,000 in September, with the largest decline occurring in the non-education component of local government (-24,000).

Employment in transportation and warehousing continued to trend down in September. The number of jobs in financial activities, professional and business services, leisure and hospitality, and information showed little or no change over the month.

U.S. House Committee Probes Economic Plight of Minorities in Recession

The following was released by the press office of the U.S. House of Representatives Oversight and Government Reform Committee

U.S. Representative Edolphus “Ed” Towns (D-NY), the Chairman of the House Oversight and Government Reform Committee, today announced that the House Oversight and Government Reform Committee is holding a congressional hearing, entitled “The Silent Depression: How are Minorities Faring in the Economic Downturn?” to examine the disparate effects of the current economic downturn on minority populations, with special emphasis on the rise in unemployment and home foreclosures.

Congressman Edolphus Towns

The hearing, scheduled for Wednesday, September 23, 2009 at 10:00 a.m. in Room 2154 of the Rayburn House Office Building, will feature the heads of several leading minority organizations, including the National Urban League, National Council of La Raza, National Coalition for Asian Pacific American Community Development, National Congress of American Indians and National Black Chamber of Commerce. Also set to testify are the Honorable Raymond Skinner of the Maryland Department of Housing and Community Development, Chief Operating Officer James Carr of the National Community Reinvestment Coalition and Christian Weller, PhD, of the Center for American Progress Action Foundation.

“The inability to find gainful employment has crushed the hopes of achieving the American dream for so many families in minority communities,” said Chairman Towns. “For us to move ahead as a nation, we have to examine why the African-American unemployment rate in several communities more than doubles that of whites. We must also take a look at the high rate of subprime loans and default mortgages within minority communities that are expanding an already enormous debt disparity.”

Although the recession has had devastating consequences for the nation’s economy and a direct effect on nearly every American household, minorities are at least 40 percent more likely to be unemployed than whites, according to a study by the Center for American Progress, with the highest rates of unemployment in the African American population. In states with significant minority populations like New York State, the African American unemployment rate has soared to 15.1 percent, compared to 6.4 percent for whites. In New York City, where minorities make up more than 50% of the population, the rise in unemployment for African-Americans has spiked to four times that of whites, according to a recent New York Times article.

Unscrupulous lending practices may compound the economic crisis, with home foreclosures higher amongst minorities than whites. Since the recession began, home foreclosures increased dramatically, but experts agree that for African-Americans and Hispanics, record foreclosures may be the result of lax enforcement of the Fair Housing Act or reverse redlining, homeownership schemes targeted at minority groups. Wednesday’s Oversight Committee hearing will review these factors.

“The fact of the matter is that the current economic downturn has amplified an already burgeoning economic gap for minorities,” said Chairman Towns. “The role of race in unemployment and other economic trends is something we must analyze because for minorities this is not a recession but is, in fact, a depression that could potentially alter decades of economic progress.”

President Obama’s Reasons for Renominating Bernanke to 2nd Term as Federal Reserve Chairman

President Barack Obama made the following remarks on August 25 at his announcement that Federal Reserve System Board Chairman Ben Bernanke was being renominated for a second four-year term.  His current term expires January 31, 2010.

Good morning, everybody. I apologize for interrupting the relaxing that I told all of you to do, but I have an important announcement to make concerning the Federal Reserve.

The man next to me, Ben Bernanke, has led the Fed through one of the worst financial crises that this nation and the world has ever faced. As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another. But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve. And that is why I am re-appointing him to another term as Chairman of the Federal Reserve.

President Barack Obama

Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and out-of-the-box thinking that has helped put the brakes on our economic freefall. Almost none of the decisions that he or any of us made have been easy. The actions we’ve taken to stabilize our financial system, to repair our credit markets, restructure our auto industry, and pass a recovery package have all been steps of necessity, not choice. They’ve faced plenty of critics, some of whom argued that we should stay the course or do nothing at all. But taken together, this “bold, persistent experimentation” has brought our economy back from the brink. They’re steps that are working. Our recovery plan has put tax cuts in people’s pockets, extended health care and unemployment insurance to those who have borne the brunt of this recession, and is continuing to save and create jobs that otherwise would have been lost. Our auto industry is showing signs of life. Business investment is showing signs of stabilizing. Our housing market and credit markets have been saved from collapse.

Of course, as I’ve said before, we are a long way away from completely healthy financial systems and a full economic recovery. And I will not let up until those Americans who are looking for jobs can find them; until qualified businesses, large and small, who need capital to grow can find loans at a rate they can afford; and until all responsible mortgage-holders can stay in their homes. That’s why we need Ben Bernanke to continue the work he’s doing, and that’s why I’ve said that we cannot go back to an economy based on overleveraged banks, inflated profits, and maxed-out credit cards.

Ben Bernanke

For even as we’ve taken steps to rescue our financial system and our economy, we must now work to rebuild a new foundation for growth and prosperity. We have to build an economy that works for every American, and one that leads the world in innovation, in investments, and in experts — exports.

Part of that foundation has to be a financial regulatory system that ensures we never face a crisis like this again. We’ve already seen how lax enforcement and weak regulation can lead to enormous wealth for a few and enormous pain for everybody else. And that’s why even though there is some resistance on Wall Street from those who would prefer to keep things the way they are, we will pass the reforms necessary to protect consumers, investors, and the entire financial system. And we will continue to maintain a strong and independent Federal Reserve.

We will also keep working towards the reform of a health insurance system whose costs and discriminatory practices are bankrupting our families, our businesses, and our government. We will continue to build a clean energy economy that creates the jobs and industries of the future within our borders. And we will give our children and our workers the skills and training they need to compete for these jobs in the 21st century.

Much like the decisions we’ve made so far, the steps we take to build this new foundation will not be easy. Change never is. As Ben and I both know, it comes with debate and disagreement and resistance from those who prefer the status quo. And that’s all right, because that’s how democracy is supposed to work. But no matter how difficult change is, we will pursue it relentlessly because it is absolutely necessary to lift this country up and create an economy that leads to good jobs, broad growth, and a future our children can count on. That’s what we’re here to do, and that’s what we will continue to do in the months ahead. So I want to congratulate Ben on the work that he’s done so far, wish him continued success in the hard work that he has before him. Thank you so much, Ben.

Federal Reserve Chairman Testifies to Congress on U.S. Economic Condition

The following written testimony was provided by Federal Reserve Board of Governors Chairman Ben Bernanke to the U.S. House of Representatives Committee on Financial Services on July 21.

Chairman Frank, Ranking Member Bachus, and other members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress.

Ben Bernanke

Economic and Financial Developments in the First Half of 2009
Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system, an event that would have had extremely adverse and protracted consequences for the world economy. Even so, the financial shocks that hit the global economy in September and October were the worst since the 1930s, and they helped push the global economy into the deepest recession since World War II. The U.S. economy contracted sharply in the fourth quarter of last year and the first quarter of this year. More recently, the pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization. The labor market, however, has continued to weaken. Consumer price inflation, which fell to low levels late last year, remained subdued in the first six months of 2009.

To promote economic recovery and foster price stability, the Federal Open Market Committee (FOMC) last year brought its target for the federal funds rate to a historically low range of 0 to 1/4 percent, where it remains today. The FOMC anticipates that economic conditions are likely to warrant maintaining the federal funds rate at exceptionally low levels for an extended period.

At the time of our February report, financial markets at home and abroad were under intense strains, with equity prices at multiyear lows, risk spreads for private borrowers at very elevated levels, and some important financial markets essentially shut. Today, financial conditions remain stressed, and many households and businesses are finding credit difficult to obtain. Nevertheless, on net, the past few months have seen some notable improvements. For example, interest rate spreads in short-term money markets, such as the interbank market and the commercial paper market, have continued to narrow. The extreme risk aversion of last fall has eased somewhat, and investors are returning to private credit markets. Reflecting this greater investor receptivity, corporate bond issuance has been strong. Many markets are functioning more normally, with increased liquidity and lower bid-asked spreads. Equity prices, which hit a low point in March, have recovered to roughly their levels at the end of last year, and banks have raised significant amounts of new capital.

Many of the improvements in financial conditions can be traced, in part, to policy actions taken by the Federal Reserve to encourage the flow of credit. For example, the decline in interbank lending rates and spreads was facilitated by the actions of the Federal Reserve and other central banks to ensure that financial institutions have adequate access to short-term liquidity, which in turn has increased the stability of the banking system and the ability of banks to lend. Interest rates and spreads on commercial paper dropped significantly as a result of the backstop liquidity facilities that the Federal Reserve introduced last fall for that market. Our purchases of agency mortgage-backed securities and other longer-term assets have helped lower conforming fixed mortgage rates. And the Term Asset-Backed Securities Loan Facility (TALF), which was implemented this year, has helped restart the securitization markets for various classes of consumer and small business credit.

Earlier this year, the Federal Reserve and other federal banking regulatory agencies undertook the Supervisory Capital Assessment Program (SCAP), popularly known as the stress test, to determine the capital needs of the largest financial institutions. The results of the SCAP were reported in May, and they appeared to increase investor confidence in the U.S. banking system. Subsequently, the great majority of institutions that underwent the assessment have raised equity in public markets. And, on June 17, 10 of the largest U.S. bank holding companies–all but one of which participated in the SCAP–repaid a total of nearly $70 billion to the Treasury.

Better conditions in financial markets have been accompanied by some improvement in economic prospects. Consumer spending has been relatively stable so far this year, and the decline in housing activity appears to have moderated. Businesses have continued to cut capital spending and liquidate inventories, but the likely slowdown in the pace of inventory liquidation in coming quarters represents another factor that may support a turnaround in activity. Although the recession in the rest of the world led to a steep drop in the demand for U.S. exports, this drag on our economy also appears to be waning, as many of our trading partners are also seeing signs of stabilization.

Despite these positive signs, the rate of job loss remains high and the unemployment rate has continued its steep rise. Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook.

In conjunction with the June FOMC meeting, Board members and Reserve Bank presidents prepared economic projections covering the years 2009 through 2011. FOMC participants generally expect that, after declining in the first half of this year, output will increase slightly over the remainder of 2009. The recovery is expected to be gradual in 2010, with some acceleration in activity in 2011. Although the unemployment rate is projected to peak at the end of this year, the projected declines in 2010 and 2011 would still leave unemployment well above FOMC participants’ views of the longer-run sustainable rate. All participants expect that inflation will be somewhat lower this year than in recent years, and most expect it to remain subdued over the next two years.

To read the rest of the testimony click here.