Bernanke comments point to possible US recession

23 minutes ago

WASHINGTON (AFP) - Federal Reserve chairman Ben Bernanke said Wednesday that the US economy may not grow much "and could even contract slightly" in the first half of 2008, suggesting a recession may be underway.
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In remarks prepared for delivery to US lawmakers, Bernanke for the first time publicly acknowledged the possibility of recession, which is generally defined by economists as two consecutive quarters of declining activity.

"It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly," Bernanke told the Joint Economic Committee of Congress.

But he suggested any recession would be mild.

"We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies," he said.

The world's biggest economy expanded at a sluggish 0.6 percent annual pace in the fourth quarter of 2007, the latest for which official data is available, but many analysts say activity weakened further in 2008, and Bernanke agreed.

"The near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January," he said.

He said the central bank has taken numerous actions, including slashing key interest rates, easing terms for direct loans to banks and opening up the Fed's credit to securities firms, in an effort to ease stress in credit markets resulting from a housing market collapse.

"Although our recent actions appear to have helped stabilize the situation somewhat, financial markets remain under considerable stress," he said.

"Pressures in short-term bank funding markets, which had abated somewhat beginning late last year, have increased once again. Many lenders have been reluctant to provide credit to counterparties, especially leveraged investors."

Bernanke also defended the Fed move to to save investment bank Bear Stearns, saying it acted to avert a "chaotic" situation that could have triggered broad economic impacts.

Bernanke said the Fed faced "difficult questions of public policy" in the case of Bear Stearns, which had extensive positions in "critical markets."

"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," Bernanke said.

"Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain.

"Moreover, the adverse effects would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability."