April 3, 2008 in Business

‘Recession is possible,’ Bernanke says

Jeannine Aversa Associated Press
 

WASHINGTON – Ben Bernanke knows a recession when he sees one, and he’s starting to sound like that’s just what he expects to see.

A student of the Great Depression, the Federal Reserve chairman once served on the very panel of experts that unofficially determines when recessions begin and end – a finding that usually comes well after the fact.

For the first time, Bernanke as Fed chief acknowledged Wednesday that the U.S. could reel into recession from the powerful punches of housing, credit and financial crises. Yet he was coy about the Federal Reserve’s next move.

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

“A recession is possible,” said Bernanke, who in his two years at the helm 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.”

Regardless of whether 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.

But Bernanke didn’t offer a clear signal about the Fed’s interest-rate intentions from here on.

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 key 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.

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.”

Bernanke urged Congress to take additional steps to bolster the housing market and to aid people in danger of losing their homes. But he refused to be pinned down on making specific recommendations in other areas, such as how to help struggling state governments hit by the crisis. That exasperated Sen. Edward Kennedy, D-Mass., who pleaded: “What are we going to tell the states? … The states are in a critical situation.”

Besides lowering interest rates, the Fed has taken a series of extraordinary steps in recent weeks and months to prop up the nation’s financial system, which has been in a 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.

That brought criticism from Democrats and others who contend the Fed is bailing out Wall Street and putting billions of taxpayer dollars at potential risk.

Bernanke defended the move as necessary to avert a meltdown in the entire financial system.

Although the taxpayers are on the hook for the $29 billion, Bernanke believed they wouldn’t suffer any losses.

“I feel reasonably confident that we will be able to recover all of the principal and indeed some interest, and there is some chance of even upside beyond that.”

© Copyright 2008 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


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