Bernanke warns of a likely recession
Testifying before Congress' Joint Economic Committee, the chairman of the Federal Reserve says 'the near-term economic outlook has weakened.' But he expects the economy to make a comeback by year's end.
WASHINGTON — Federal Reserve Chairman Ben S. Bernanke warned this morning that threats to the economy are far from over, with unemployment on the rise, prices for food and fuel growing, and real incomes on the wane.
Recession is more likely than ever, he said in prepared remarks as he testified before Congress' Joint Economic Committee.
"Overall, the near-term economic outlook has weakened" since January, Bernanke said. "It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly."
The Fed chairman said he considered inflation to be a secondary threat to the economy, citing a leveling off of commodities prices in the futures markets, especially for oil. And he said that he expects the economy to be on the rebound by the end of the year.
"Clearly the U.S. economy is going through a very difficult period," Bernanke said. "But among the great strength of our economy is its ability to adapt and to respond to diverse challenges. 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 also defended the Fed's decision last month to underwrite the buyout of troubled Wall Street brokerage Bear Stearns by JPMorgan Chase -- a decision that led the central bank for the first time in more than 70 years to make loans to non-banks.
"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," Bernanke explained. "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."
The committee's chairman, Sen. Charles Schumer (D-N.Y.), praised the Fed's move to rescue Bear Stearns as providing "much needed breathing room" to the economy but insisted that the government do much more to help ordinary homeowners stressed by the housing market downturn.
"The administration was all for government action in the case of Bear Stearns, but what about government action to help homeowners?" Schumer asked in opening remarks. "Yes, Bear Stearns was in trouble, but millions of homeowners are also in trouble. Yes, Bear Stearns needed government intervention, but what about government intervention for homeowners?"
Bernanke was scheduled to testify before congressional committees for the next two days about the Bear Stearns deal, the decision to provide direct Fed loans to investment banks, and the state of the economy.
maura.reynolds@latimes.com
