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'R' word passes Bernanke's lips

Associated Press

Associated Press

WASHINGTON — For the first time, Federal Reserve Chairman Ben Bernanke acknowledged that the United States could reel into recession from the powerful punches of housing, credit and financial crises.

Yet he was coy about the Fed's next move in testimony Wednesday before Congress.

With home foreclosures swelling to record highs and job losses mounting, Bernanke offered Congress a more pessimistic assessment of potential damage to the national economy.

"A recession is possible," he said. "Our estimates are that we're slightly growing at the moment, but we think that there's a chance that for the first half as a whole there might be a slight contraction."

Under one rule of thumb, six straight months of a shrinking economy would constitute a recession, but Bernanke wasn't getting into that. "A recession is a technical term," he said. "I'm not yet ready to say whether or not the U.S. economy will face such a situation."

Whether or not the economy already has fallen into its first recession since 2001, the housing debacle and other economic woes are a major concern for homeowners, workers and investors. That means they're a concern to Congress and the presidential contenders, too.

Hoping to limit damage, the Federal Reserve has been slashing interest rates since the start of the year in an effort to get people and companies spending again. "We are fighting against the wind," Bernanke said, "at least offsetting significantly the headwinds coming from these financial factors."

But he didn't offer a clear signal about the Fed's interest rate intentions from here on.

At the last meeting of the central bank's policymakers in March, two members dissented from the decision to sharply cut rates. Those officials, who have reputations for being extra vigilant about fighting inflation, are concerned that cutting rates too much or too quickly could damage the economy by pushing prices higher.

Although Bernanke said he hopes inflation will moderate in coming quarters, he said high energy prices have clouded the outlook.

Still, economists predict the Fed will drop its key rate at its next meeting at the end of this month. Some analysts predicted the rate would fall as low as 1.50 percent this year, from the current 2.25 percent.

On Wall Street, stocks initially dropped after the Fed chief's remarks, then fluctuated through the day before ending moderately lower.

Striking a hopeful note, Bernanke said he expects economic growth to pick up in the second half of the year and into 2009, helped by the government's $168-billion package of tax rebates for people and tax breaks for businesses as well as the Fed's aggressive interest rate reductions.

"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.

Bernanke urged Congress to take additional steps to bolster the housing market and to aid people in danger of losing their homes. He refused to be pinned down on specific recommendations in other areas, such as how to help struggling state governments hit by the crisis.

'R' word passes Bernanke's lips 04/02/08 [Last modified: Wednesday, April 2, 2008 11:25pm]
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