It Might Be a Recession, Fed Chief Tells Congress ( Archived) (3)

Bernanke, Using a Word Rarely Uttered by Top Officials, Lays Out a Litany of Economic Problems


By Neil Irwin and Renae Merle
Washington Post Staff Writers
Thursday, April 3, 2008; Page A01

Federal Reserve Chairman Ben S. Bernanke acknowledged yesterday for the first time that the United States may be in a recession, projecting that the economy could shrink during the first half of this year.

"It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and may contract slightly," Bernanke told the congressional Joint Economic Committee. In response to a question, he said "a recession is possible" -- a rare use of the word "recession" by a Fed chairman. Fed leaders traditionally worry about giving markets a reason for pessimism.

Bernanke's comments marked a notable shift in tone, reflecting continuing soft economic data and a view that the breakdown in financial markets poses a rising threat to the overall economy. Just over a month ago, Bernanke said he expected "sluggish economic activity" but did not mention a possible contraction.

He did say yesterday that he expects growth to strengthen in the second half of the year and to be solid in 2009, as the Fed's recent interest rate cuts and the government's fiscal stimulus package ripple through the economy.

Though he dismissed as an academic exercise the question of whether there is a recession, economic analysts said Bernanke's acknowledgment was significant.

"He's being much more candid and upfront about the problems and risks in the economy," said Brian A. Bethune, U.S. economist at the consulting firm Global Insight. "This testimony says that the Fed isn't in denial anymore."

That deepening concern about the economy helps explain the central bank's dramatic actions over the past month to help credit markets, including its intervention to save the Wall Street giant Bear Stearns. With the investment bank on the brink of bankruptcy, the Fed brokered Bear's sale to J.P. Morgan Chase and agreed to back $29 billion in risky securities on Bear Stearns's books.

Bernanke strongly defended those moves yesterday, arguing that problems in the financial markets would have become much worse had Bear Stearns been allowed to fail. Those problems already make it more expensive for people to borrow money to buy a house or car and for businesses to borrow so they can expand. That in turn undermines efforts by the Fed to promote growth by cutting interest rates.

Bernanke gave little indication of whether, or how much, the Fed would cut interest rates at its next policymaking meeting, April 30. Starting in September, the central bank has cut the short-term rate it controls by three percentage points, to 2.25 percent.

In his sober presentation, Bernanke offered a tour of the problems besetting the economy.

"The unemployment rate edged down in February and remains at a relatively low level," he said. "However, in light of the sluggishness of economic activity and other indicators of a softer labor market, I expect it to move somewhat higher in coming months."

Consumers are also pulling back, he said. "Concerns about employment and income prospects, together with declining home values and tighter credit conditions, have caused consumer spending to decelerate."



Continued

Businesses are retrenching, with "some reduction in capital spending plans, as weaker sales prospects, tighter credit and heightened uncertainty have made business leaders more cautious," he said.

The Fed's forecast, like that of many private economists, calls for conditions to improve in the second half of the year as efforts by the Fed and Congress to stimulate the economy take effect. But there is an unusual degree of uncertainty surrounding that expectation; Bernanke described his projection as "kind of provisional."

"We'll see how things evolve," he said in response to a question.

In his first public comments since the government rescue of Bear Stearns, Bernanke chafed at the idea that it amounted to a bailout.

"We did not bail out Bear Stearns. Bear Stearns's shareholders took a very significant loss," he said. "An 85-year-old company lost its independence and became acquired by another firm. Many Bear Stearns employees, as you know, are concerned about their jobs."

He described the effort as necessary to prevent a wider crisis.

"We did what we did because we felt it was necessary to preserve the integrity and viability of the American financial system, which in turn is critical for the health of the economy," Bernanke said.

The Senate Banking Committee is scheduled to hold a hearing today on the Bear Stearns deal. Several of the key participants are to appear, including the chief executives of Bear Stearns and J.P. Morgan and Timothy F. Geithner, president of the Federal Reserve Bank of New York.

After Bernanke began his testimony, U.S. stocks briefly climbed, but they ended the day down. The Dow Jones industrial average fell 48.53 points, to 12,605.83. The Standard & Poor's 500-stock index fell 2.65 points, closing at 1367.53. The Nasdaq composite index fell 1.35 points, to 2361.40.

Bernanke's visit to Capitol Hill overshadowed two economic reports that analysts said underscored the risk of a recession. Factory orders fell for the second month in a row in February, according to the Commerce Department. Private non-farm employment increased by 8,000 jobs in March, continuing a "sharp deceleration of employment growth," according to a report from ADP, a payroll company.

Neither result was surprising, according to economists, who said they were awaiting government unemployment figures to be released tomorrow. "Everybody's holding their breath for Friday's jobless number," said Joshua Shapiro, chief U.S. economist for MFR, a New York research firm.

He said Bernanke had to admit the possibility of recession to maintain his credibility. "I think it was a dose of a reality," Shapiro said. "There are still some big problems out there, things to get through before you can rest easy."

During his testimony, Bernanke frustrated some committee members by declining to step into a congressional debate over how the government should help homeowners avoid foreclosure.

"You're not prepared to tell us whether to try and provide help and assistance to the states?" said Sen. Edward M. Kennedy (D-Mass.).

Others were more plaintive.

"I know it's up to us, but you're the expert," said Rep. Elijah E. Cummings (D-Md.). "You're the one that we depend on. You're the superstar. And I'm very serious about that. . . . I mean, I'm just asking you for three or four things that would . . . help this situation."

Bernanke listened, poker-faced. Then, refusing to oblige, he launched into a general exposition on the U.S. economy.