Chairman of the US Federal Reserve Ben Bernanke. Chances of a US recession are at 50 per cent. - file

United States Federal Reserve Chairman Ben Bernanke said Tuesday there have been "tentative signs" that the recession may be easing.

But he also warned that any hope for a lasting recovery hinges on the government's success in stabilising shaky financial markets and getting credit to flow more freely again.

Specifically, the Fed chief mentioned improvements in recent data on home and auto sales, home building and consumer spending as flickering signs of encouragement.

"Recently we have seen tentative signs that the sharp decline in economic activity may be slowing," Bernanke said in remarks prepared for students and faculty at Morehouse College in Atlanta.

"A levelling out of economic activity is the first step toward recovery. To be sure, we will not have a sustainable recovery without a stabilisation of our financial system and credit markets," he said.

But the Fed is "making progress on that front as well," Bernanke said, and will keep working to ease financial and credit stresses so those markets operate normally.

To revive the economy, the Fed has cut a key bank lending rate to a record low of near zero and has rolled out a number of radical programmes to spur lending to Americans, a key ingredient to turning around the economy.

On that front, the Fed recently plowed US$1.2 trillion into the economy in an attempt to reduce interest rates for mortgages and other loans.

Economy shrinking

Many analysts believe the economy will continue to shrink in the April-June quarter, but not nearly as much as it had been - perhaps at a rate of 2 to 2.5 per cent.

The economy shrank at a 6.3 per cent rate in the final three months of 2008, the worst showing in a quarter-century.

President Barack Obama is counting on the US$787 billion stimulus of tax cuts and increased government spending to help bolster economic activity.

The administration also has put forward plans to prop up troubled banks and to reduce home foreclosures.

The government is battling a three-headed monster: housing, credit and financial crises, which are the worst since the 1930s.

"The current crisis has been one of the most difficult financial and economic episodes in modern history," Bernanke said.

Some critics worry that the Fed's policies could spur inflation over the long run if key interest rates aren't quickly boosted and special lending programmes aren't rapidly dismantled once the economy shows strong signs of turning around.

Balancing act

Bernanke acknowledged this will be a challenge and will require a delicate balancing act. But he was optimistic the Fed is "well equipped to make those judgments appropriately."

Meanwhile, the government's bailout of giant insurer American International Group Inc, to the tune of more than US$180 billion, underscores the urgent need for stronger regulations and new powers to minimise the damage from the collapse of a huge non-bank financial company, the Fed chief said.

"In my view, preventing the failure of AIG was the best of the very bad options available, but it nevertheless involved major costs, including financial risks to the taxpayer," Bernanke said.

- AP