Bernanke warns of possible recession without using the word

By Jeannine Aversa

Associated Press

WASHINGTON — Federal Reserve Chairman Ben Bernanke warned Congress on Wednesday that the economy may shrink over the first half of this year, which would signal the start of a recession. Yet, he didn’t offer assurances of further interest rate cuts.

In prepared testimony to Congress’ Joint Economic Committee, Bernanke didn’t use the word recession. But it’s the closest he has come to date to suggesting that possibility, given a trio of crises — housing, credit and financial — that has pummeled the country.

"It now appears likely that gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly," Bernanke told lawmakers. GDP measures the value of all goods and services produced within the United States and is the best barometer of the United States’s economic health. Under one rule, six straight months of declining GDP, would constitute a recession.


Still, Bernanke said that he expects more economic growth in the second half of this year and into 2009, helped by the government’s $168 billion stimulus package of tax rebates for people and tax breaks for businesses as well as the Fed’s aggressive reductions to a key interest rate. Nevertheless, the chairman acknowledged uncertainty about the Fed’s next steps, notwithstanding the mounting economic woes.

"Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year," Bernanke said.

To try to limit the damage, the Federal Reserve has aggressively cut a key interest rate, now at 2.25 percent, to spur buying and investing by individuals and businesses. At the Fed’s last meeting in March, however, two members dissented from the Fed’s decision to sharply cut rates, showing a rare division in the often unified front the Fed shows the public. The dissenting officials, who had reputations for being extra concerned about inflation, favored a smaller reduction. Although Bernanke said he hopes inflation will moderate in coming quarters, he acknowledged that high energy prices have clouded the inflation outlook.

Nonetheless, many economists had predicted the Fed might drop it key that rate again when it next meets April 29-30.

Housing, credit and financial woes are threatening to push the country into a deep recession. The situation has emerged as a top concern for presidential contenders and a hot-button issue for Congress. It has thrust the White House and the Fed in crisis-management mode.

Faced with mounting home foreclosures and job losses, Bernanke has been under immense political and public pressure to provide relief and help turn around a faltering economy.

Committee Chairman Sen. Charles Schumer, D-N.Y., peppered Bernanke with questions about the Fed’s moves to aid once mighty Wall Street firm Bears Stearns and then juxtaposed that with — what he believed was a lack of help — to millions of people at risk of losing their homes. "I hope you will use your position to jawbone this administration" into backing congressional efforts to provide housing relief, Schumer said.

"Wall Street has been helped. Now it’s time to help Main Street," added Rep. Carolyn Maloney, D-N.Y.


Many private analysts believe the economy contracted in the first three months of this year, signaling the start of a recession. The government releases first-quarter results later this month. The economy lost jobs in January and February, with many economists bracing for more losses when the report for March is released on Friday. Bernanke said he expected unemployment to move "somewhat higher in coming months."

"Clearly, the U.S. economy is going through a very difficult period," he told lawmakers, adding that all the problems have weighed heavily on consumers whose spending is indispensable to economic vitality.

The Fed also has taken a series of extraordinary steps in recent weeks and months to prop up the nation’s financial system, which has been in state of high jeopardy.

In a controversial move, the Fed backed a $29 billion lifeline as part of JP Morgan’s deal to take over the troubled Bear Stearns, the nation’s fifth largest investment house, which was on the brink of bankruptcy. Bear Stearns had invested heavily in risky mortgage-backed securities that eventually soured with the collapse of the housing market.

Bernanke defended the move. "With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence," he said. "The damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain."

In addition, the Fed — in the broadest use of its credit authority since the 1930s — agreed to temporarily let big investment firms obtain emergency financing from the Fed, a privilege that previously had been granted only to commercial banks.

Those actions have prompted criticism from Democrats and others who contend that the Fed is bailing out Wall Street and putting billions of taxpayers’ dollars at potential risk. Fed officials and the Bush administration say the actions were warranted to avert a potential meltdown in the entire financial system, something that would have devastating consequences for the overall economy.

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