It Might Be a Recession, Fed Chief Tells Congress

Video
Federal Reserve Chairman Ben Bernanke warned Congress on Wednesday that the economy may shrink over the first half of this year, which would signal the start of a recession. Video by AP
By Neil Irwin and Renae Merle
Washington Post Staff Writers
Thursday, April 3, 2008

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."


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