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Bernanke Says Recession Possible

Apr 2 04:16 PM US/Eastern


By JEANNINE AVERSA
AP Economics Writer
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WASHINGTON (AP) - 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
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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 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.

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."

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.
"The damage caused by a default by Bear
Stearns could have been severe and extremely
difficult to contain," he said. The Fed's
unprecedented involvement was meant as a
one-time event. "It has never happened before,
and I hope it never happens again," he told
lawmakers.

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 principle
and indeed some interest, and there is some
chance of even upside beyond that."

To also ease the credit crisis, the Fed—in the


broadest use of its lending authority since the
1930s—agreed to temporarily let big investment
firms obtain emergency financing.

Bernanke said the Fed "never lost a penny" in


the past from various lending maneuvers.

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