Federal Reserve Chairman Ben Bernanke said the U.S. economy could face a mild recession but that growth should pick up as the impact of aggressive interest rates cuts are felt.
"Recession is possible, but recession is a technical term ...I'm not ready to say whether or not the U.S. economy will face such a situation," Bernanke told the congressional Joint Economic Committee.
"It's clearly a period of very slow growth extending back to the fourth quarter of last year, and we are trying to set our policies appropriately for that situation," he said.
"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." Bernanke said the economic outlook was highly uncertain and that risks to the Fed's somber forecast were to the downside.
He added that inflation also remained a concern, saying uncertainty surrounded the outlook for prices as well.
Bernanke's testimony was a much more pessimistic assessment of the economy's immediate prospects amid a trio of crises -- housing, credit and financial.
Still, Bernanke said that he expects more economic growth in the second half of this 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 reductions to a key interest rate.
Nevertheless, the chairman acknowledged uncertainty about the Fed's next steps, notwithstanding the mounting economic woes.
"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 lowered its target for benchmark interest rates by three percentage points to 2.25 percent since mid-September, and Bernanke did not close the door to more rate reductions.
Rate Cuts Ending?
However, he said rate cuts to date and emergency measures to provide liquid funds to 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.
Stocks zig-zagged around the flatline as a report showing small private sector job gains offset Bernanke's gloomy assessment of the economic outlook, and short-dated Treasury bond prices extended losses.
The dollar erased gains against the euro and pared advances against the yen .
The U.S. central bank chief appears before Congress slightly more than two weeks after the Fed provided emergency funding to prevent the failure of troubled investment bank Bear Stearns, which he said could have caused a "chaotic" market reaction that would have been difficult to contain.
Bernanke said financial markets remain under considerable strain but emergency liquidity measures 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 key market for agency mortgage-backed securities, appear to be more liquid.
Although Bernanke said he hopes inflation will moderate in coming quarters, he acknowledged that high energy prices have clouded the inflation outlook.
Nonetheless, many economists had predicted the Fed might drop it key that rate again when it next meets April 29-30.
Housing, credit and financial woes are threatening to push the country into a deep recession. The situation has emerged as a top concern for presidential contenders and a hot-button issue for Congress. It has thrust the White House and the Fed in crisis-management mode.
Faced with mounting home foreclosures and job losses, Bernanke has been under immense political and public pressure to provide relief and help turn around a faltering economy.
Committee Chairman Sen. Charles Schumer, D-N.Y., peppered Bernanke with questions about the Fed's moves to aid once mighty Wall Street firm Bears Stearns and then juxtaposed that with -- what he believed was a lack of help -- to millions of people at risk of losing their homes.
"I hope that you will use your position to jawbone this administration to get behind the housing relief effort before Congress." Schumer said. "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."
"Wall Street has been helped. Now it's time to help Main Street," added Rep. Carolyn Maloney, D-N.Y.
Economy in 'Difficult Period'
Many private analysts believe the economy contracted in the first three months of this year, signaling the start of a recession. The government releases first-quarter results later this month. The economy lost jobs in January and February, with many economists bracing for more losses when the report for March is released on Friday.
Bernanke said he expected unemployment to move "somewhat higher in coming months."
"Clearly, the U.S. economy is going through a very difficult period," he told lawmakers, adding that all the problems have weighed heavily on consumers whose spending is indispensable to economic vitality.
The Fed also has taken a series of extraordinary steps in recent weeks and months to prop up the nation's financial system, which has been in 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.
Bernanke defended the move. "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."
In addition, the Fed -- in the broadest use of its credit authority since the 1930s -- agreed to temporarily let big investment firms obtain emergency financing from the Fed, a privilege that previously had been granted only to commercial banks.
Those actions have prompted criticism from Democrats and others who contend that the Fed is bailing out Wall Street and putting billions of taxpayers' dollars at potential risk. Fed officials and the Bush administration say the actions were warranted to avert a potential meltdown in the entire financial system, something that would have devastating consequences for the overall economy.