Fed Chairman Says 'Recession Possible' But Sees Recovery
Wednesday April 2, 6:45 pm ET
Scott Stoddard
Federal Reserve chief Ben Bernanke acknowledged for the first time Wednesday that the U.S. economy could fall into recession.
"Real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly," Bernanke said in testimony to Congress' Joint Economic Committee. "A recession is possible."
But Bernanke predicted a second-half rebound thanks to steep interest rate cuts, the government's $168 billion stimulus plan and Fed efforts to shore up ailing banks.
"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.
Defends Bear Takeover Deal
It was his first public testimony since the Fed last month slashed rates by three-quarters of a point 14d engineered JPMorgan Chase's buy of ailing investment bank Bear Stearns. As part of that deal, the central bank took the risk for $29 billion in Bear assets.
Bernanke defended the rescue, saying the sudden failure of America's No. 5 investment bank would have had "unpredictable but likely severe consequences" for credit markets and the overall economy.
He said Bear Stearns advised the Fed on March 13 that its cash position had "significantly deteriorated" and that it would have to file for bankruptcy the next day unless it got an injection of funds.
The Fed gave funds to Bear via JPMorgan on March 14, then pushed a weekend takeover.
"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," Bernanke said.
The Fed has slashed its fed funds target rate by 3 percentage points to 2.25% since September and has pumped cash into financial institutions in a variety of new ways to try to bolster the flagging economy and encourage lending.
The central bank's actions "appear to have helped stabilize the situation somewhat," but Bernanke admitted that "financial markets remain under considerable stress."
Economic Trends Weak
Commercial and industrial loans at banks in January and February grew at a "considerably slower pace" than in prior months, Bernanke said. Mortgage loans also remain hard to obtain, hindering a housing recovery.
The U.S. grew at an annual rate of just 0.6% in the fourth quarter, and the news has gotten worse in 2008. The private sector cut 101,000 jobs in February, and consumer spending has decelerated "considerably," Bernanke said.
The Fed expects growth to return to normal in 2009 as financial conditions improve and housing activity stabilizes.
"I remain confident in our economy's long-term prospects," Bernanke said. But, he cautioned, "the uncertainty attending this forecast is quite high, and the risks remain to the downside."
Stocks seesawed on Bernanke's testimony, closing modestly lower. The Dow fell 0.4%, the S&P 500 0.2% and the Nasdaq 0.1%.
The 10-year Treasury yield rose 5 basis points to 3.61%.
Futures traders expect the Fed to trim borrowing costs by a quarter-point 15 2% at its April 29-30 meeting, even after two policymakers dissented from March's big rate cut due to inflation fears.
"It is getting more difficult for the Fed to keep cutting rates," said Nigel Gault, U.S. research director at Global Insight.
But, he added, "The economic news will be bad enough to make them decide to move lower."
He sees the fed funds rate at 1.5% by midyear.
Bernanke reiterated that the Fed expects inflation to "moderate in coming quarters" as commodity prices level off and growth slows.
He said Treasury Secretary Henry Paulson's proposed regulatory reforms are an "intriguing first step." The plans call for broader supervisory powers for the Fed, including over investment banks.
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