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Bernanke sees 'formidable headwinds' ahead -

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ELEANOR HALL: The world's most powerful central banker is warning that there won't be a quick fix
for the global economy as it pulls out of the worst downturn since the Great Depression.

The chairman of the US Federal Reserve Ben Bernanke last night delivered a sober reality check to
those optimists who have been talking up a rapid economic recovery in the United States, as
business editor Peter Ryan reports.

PETER RYAN: In the still early days of the recovery in the United States, some economists have been
predicting a bullish V-shaped comeback to prosperity.

But Ben Bernanke, who's credited with pulling the US back from an economic abyss, believes any
expansion will be moderate at best.

BEN BERNANKE: We have begun to see some improvement in economic activity. We still have some way to
go before we can be assured that the recovery will be self-sustaining.

PETER RYAN: The one-time economics professor and Great Depression buff was busy managing
expectations when he fronted the Economic Club of Washington today.

He warned that despite the surprise fall in America's jobless rate from 10.2 per cent to 10 per
cent, there was still the challenge of getting the 7.2 million people back to work.

BEN BERNANKE: Economic forecast is subject to great uncertainty but my best guess at this point is
that we will continue to see modest growth next year sufficient to bring down the unemployment rate
but at a pace slower than we would like.

PETER RYAN: Ben Bernanke also warned that with the credit crisis alive and well, businesses of all
sizes would struggle to expand and hire new staff.

BEN BERNANKE: The economy confronts some formidable headwinds that seem likely to keep the pace of
expansion moderate. Despite the general improvement in financial conditions, credit remains tight
for many borrowers particularly bank dependent borrowers such as households and small businesses.

PETER RYAN: Ben Bernanke also says inflation is expected to remain subdued and might move even
lower, meaning US interest rates are set to remain close to zero for what he calls an extended

The low rate future pushed Wall Street higher this morning, despite the pessimistic outlook.

Harvard economics professor Kenneth Rogoff says Ben Bernanke has little option but to stay the

KENNETH ROGOFF: There are in a very tough spot at the moment. You know, just having the recovery
that is no doubt that is at the top of the agenda at the moment.

PETER RYAN: Ken Rogoff agrees now is not the time to move rates from their current emergency

KENNETH ROGOFF: Oh, goodness no. I mean it would be suicidal. I mean, no. I think the question is
do we start talking about it in the middle of next year when you need to say we are going to anchor
inflation. Of course they have to say that.

I think they are in a difficult position just getting out of this liquidity trap some day, being
able to raise rates.

PETER RYAN: But others continue to point to the hazards of keeping interest rates too low for too

KEVIN HASSETT: We need to be cautious but we also want to try to avoid mistakes from excessive

PETER RYAN: Kevin Hassett of the American Enterprise Institute is talking about the record low
interest rates that contributed to the subprime mortgage crisis.

He says the key hurdle now is jobs, but thinks the recovery might be better than Ben Bernanke

KEVIN HASSETT: If we get a really strong job support next month, if we get another decline in the
unemployment rate then the Fed might have to change that language you were talking about earlier
and make it seem like well hey, you know, we might have to increase interest rates sometime soon.

And I think that if that happens without people having the conversation we are having right now
then it will be a real shock to the market and so right now we need to say hey guys, look, you
might be a little too pessimistic. The two recessions that were most like this one had pretty big
snap backs and that might happen to us too.

PETER RYAN: But the likelihood of continuing instability next year could temper that optimism.

The commercial property sector in the United States is viewed by many as a ticking time bomb for
2010, with some valuations tipped to fall by as much as 50 per cent as banks renegotiate troubled

ELEANOR HALL: That's business editor Peter Ryan.