Bernanke warns of possible recession - East Valley Tribune: Business

Bernanke warns of possible recession

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Posted: Wednesday, April 2, 2008 8:13 am | Updated: 8:52 pm, Fri Oct 7, 2011.

WASHINGTON - For the first time, Federal Reserve Chairman Ben Bernanke acknowledged the U.S. could reel into recession from the powerful punches of housing, credit and financial crises. Yet, he was coy about the Fed's next move.

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

"A recession is possible," said Bernanke, who is under immense political and public pressure to turn things around. "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 - and many economists believe it has - the housing debacle and other economic woes are a major concern for homeowners, job losers and investors. That means they're a concern to Congress and the presidential contenders, too.

The Fed and the White House have been thrust into crisis-management mode.

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 believe the Fed probably will drop its key rate again at its next meeting at the end of this month. Some analysts predicted the Fed's rate would fall as low as 1.50 percent this year, from the current 2.25 percent.

"The Fed has pulled out all the stops to rescue both financial markets and the economy and now is probably hoping for the best," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group.

On Wall Street, stocks initially dropped after the Fed chief's remarks, then fluctuated through the day before ending moderately lower. The Dow Jones industrials lost 45.44 points to finish the day at 12,608.92.Employers slashed jobs in January and February, and Friday's report for March could show more losses. The nation's unemployment rate, now at 4.8 percent, probably will move higher in coming months, Bernanke told Congress' Joint Economic Committee.

Striking a hopeful note, though, he 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 stimulus 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.

On the hot seat, Bernanke was grilled by senators about the Fed's moves to aid the once mighty Wall Street firm Bear Stearns, and about additional actions Congress and the White House should take to provide relief to struggling homeowners.

"I hope that you will use your position to jawbone this administration to get behind the housing relief effort before Congress," said committee chairman Charles Schumer, D-N.Y. "Addressing the housing crisis head-on will do as much to instill confidence in the markets as lowering interest rates or bolstering regulatory oversight of wayward mortgage lenders and financial institutions. We need to do all of it."

Sen. Robert Bennett, R-Utah, said people shouldn't view the situation as Wall Street versus Main Street.

"My experience is that Wall Street and Main Street are inextricably linked," he said. "We've reached the point in our financial system now where a community bank on Main Street has to have a correspondence with a major bank on Wall Street in order to keep things going, and that what happens in the banking system generally permeates down to the very lowest level."

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