WASHINGTON—Federal Reserve Chairman Ben Bernanke on Wednesday conceded for the first time the U.S. economy may slip into recession, but said growth should pick up later this year as interest rate cuts and other emergency steps take root.
Bernanke said in testimony before a Congressional committee that the economy appeared to be growing, but warned it could shrink in the first half of 2008. It was his first appearance on Capitol Hill since the U.S. central bank helped rescue failing investment bank Bear Stearns in the most dramatic turn to date in the credit crisis.
"Recession is possible," Bernanke told the Joint Economic Committee. "Our estimates are that we are 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."
The Fed has lowered benchmark interest rates by three percentage points to 2.25 percent since mid-September to help put a floor under an economy hit hard by a housing slump and credit market turmoil.
Bernanke said those rate cuts and other emergency measures to thaw frozen credit markets should promote growth over time—remarks traders in financial markets saw as a signal that the Fed's sharp rate-cutting action may be drawing to an end.
Some analysts said the absence of a specific pledge by Bernanke to act as needed to help the economy, a standard feature of recent Fed statements, buttressed that view. "There is a conspicuous absence of policy commitment in this statement," said Jan Hatzius, chief economist at Goldman Sachs.
Short-dated Treasury bond prices lost ground, while the dollar rose against the yen. U.S. stocks were largely flat, with the blue chip Dow Jones industrial average down about 10 points in early afternoon.
Defends Bear Stearns Rescue
Bernanke defended the Fed's role in providing emergency funding to prevent an abrupt bankruptcy at Bear Stearns—the fifth-largest U.S. investment bank—which he said could have caused a "chaotic" market reaction.
The Fed, informed on March 13 that Bear Stearns was on the verge of collapse, decided to a provide a $30 billion credit line backed by the firm's shaky assets to facilitate its purchase by JPMorgan Chase. The action raised questions about the central bank's willingness to shield investors from risks.
"Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets," Bernanke said.
"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," he said. For details see
Markets Remain Stressed
Bernanke said financial markets remain under considerable strain but that emergency measures to provide liquid funds have been helpful in alleviating some of the stresses. Funding pressures on large financial institutions seem to have eased somewhat, and some markets, including the market for mortgage-backed securities, appear to be more liquid, he said.
"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. "I remain confident in our economy's long-term prospects."
He said the Fed expects the economy to strengthen in the second half of the year, and for growth to proceed at or a little above its sustainable pace in 2009.
Housing markets should stabilize later this year and into 2009, he added.
Bernanke said a Treasury Department proposal to overhaul financial regulation, which would give the Fed responsibility for overall financial market stability but remove it from front-line bank examination duties, could hurt the Fed's ability to keep tabs on the health of the financial system.
"We could not successfully carry out this mission if we had to rely entirely on second hand reports from primary supervisors of these individual institutions," he said.
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