Federal Reserve Chairman Ben S. Bernanke acknowledged for the first time that a U.S. recession is possible because homebuilding, employment and consumer spending will deteriorate.
“It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,” Bernanke told Congress’s Joint Economic Committee yesterday. He also said the Fed’s emergency loan to Bear Stearns Cos. followed a March 13 warning by the firm that it would have to file for bankruptcy the next day.
Bernanke, making his first extensive public comments since the Fed’s decisions two weeks ago to back the takeover of Bear Stearns and lower interest rates by 0.75 percentage point, is trying to fend off criticism of the deal while struggling to prevent a deeper economic slump. He said he thought “long and hard” about the decision, and doesn’t anticipate the need for a similar rescue of another company.
While the Fed expects the economy to return to its long-term growth pace in 2009, “in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside,” he said.
Treasury notes and stocks were little changed after Bernanke’s remarks. The benchmark 10-year note yielded 3.59 percent at 12:26 p.m. in New York.
“This is a much more pessimistic assessment of the economy than what the Fed had three months ago or six months ago” said John Silvia, chief economist at Wachovia Corp. in Charlotte, N.C., who previously worked as a senior economist in Congress. “Certainly, the Fed and the capital markets have been surprised the economy has slowed so quickly.”
The Fed, in an emergency decision on Sunday, March 16, voted to authorize a loan against $29 billion of Bear Stearns assets, including mortgage-backed securities, so JPMorgan Chase & Co. would buy the company.
Bernanke, questioned by lawmakers about putting taxpayer money at risk, expressed confidence the Fed won’t lose money on the Bear Stearns deal. The Fed last week said JPMorgan will shoulder the first $1 billion of any losses.
“I feel reasonably confident that we’ll be able to recover all the principal and indeed some interest, and there is some chance of even upside beyond that,” Bernanke said.
— Bloomberg News