It Might Be a Recession, Fed Chief Tells Congress

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Bernanke Warns of Possible Recession

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.

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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.