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Bernanke hints possible recession
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U.S. Federal Reserve chairman Ben Bernanke warned Wednesday that the U.S. economy may shrink over the first half of this year, hinting that a recession may be underway.

"It now appears likely that gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly," Bernanke said in prepared testimony to Congress' Joint Economic Committee. But he did not use the word recession.

The U.S. central bank chief also ruled out a serious recession.

"We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies," he said. "And growth is expected to proceed at or a little above its sustainable pace in 2009, bolstered by a stabilization of housing activity, albeit at low levels, and gradually improving financial conditions."

"However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside," he warned.

Bernanke said the Federal Reserve has taken a series of measures to fend off a possible recession. "In response to the further weakening of economic conditions, the Federal Reserve has continued to ease the stance of monetary policy," he said.

The central bank reduced its target for the federal funds rate by a total of 125 basis points in January and by an additional 75 basis points at its March meeting, leaving the current target at 2.25 percent -- 3 percentage points below its level last summer.

"We anticipate that these actions, together with the steps we have taken to foster market liquidity, will help to promote growth over time and to mitigate the risks to economic activity," said Bernanke.

Bernanke also defended Fed's decision to save Bear Stearns, whose liquidity deteriorated recently. The Fed has voted unanimously to approve JP Morgan's takeover of Bear Stearns and agreed to provide an important multibillion dollar financial lifeline for the deal.

"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," said Bernanke.

"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," he said, adding the adverse effects would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability.

(Xinhua News Agency April 3, 2008)

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