By SPA
Washington : U.S. Federal Chairman Ben Bernanke warned Wednesday that a recession is possible, and defended the central bank’s controversial decision to bail out an investment firm in danger of bankruptcy.
Testifying before the Joint Economic Committee of Congress, Bernanke offered a more pessimistic forecast of the nation’s short-term economic future than during his last appearance before Congress.
“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.
GDP measures the value of all goods and services produced within the United States. It is considered the best way to evaluate the strength of the economy.
“A recession is possible,” Bernanke conceded, but he did forecast increased economic growth in the second half of this year and into 2009, boosted in part by a $168 billion stimulus package of individual tax rebates and tax breaks for businesses, as well as aggressive interest rate cuts by the Fed itself.
“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.
The Fed has cut a key interest rate a number of times as the economy took hits from the unfolding housing and credit crises. But Bernanke gave no firm indication during Wednesday’s meeting that the cuts would continue.
Bernanke deflected criticism from some lawmakers over the Fed’s recent decision to assist JP Morgan in taking over Bear Stearns – the fifth largest investment house in the United States. Critics of the deal say U.S. citizens in dire financial straits are more deserving of help than Wall Street companies, but Bernanke said the decision was sound.
“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. “The damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain.”
He added that he was “reasonably confident” that the $29 billion the Fed lent to JP Morgan would be repaid, adding that the deal was a one-off. “It has never happened before, and I hope it never happens again,” he said.