Fed boss says recession possible

Federal Reserve boss Ben Bernanke has warned that US gross domestic product (GDP) could contract in the first six months of 2008.

"It now appears likely that real GDP will not grow much, if at all, over the first half of 2008 and could even contract slightly," he told Congress.

Two consecutive three-month periods of negative growth is generally accepted as the definition of a recession.

He did not say "recession", but it is the closest he has come to doing so.

Mr Bernanke is beginning two days of testimony to the US Congress, where he is likely to quizzed on the Fed's rescue of Wall Street investment bank Bear Stearns, which got into trouble because of its exposure to sub-prime loans.

Significant strains

The Fed chairman said that despite the rescue, "financial markets remain under considerable stress".

"The capacity and willingness of some large institutions to extend new credit remains limited,” he added.

When asked by the committee whether he thought there would be a recession, he said, "recession is possible".

But he added that it would take as much as two years to determine whether the economy technically was in recession, based on an the judgement by the non-profit economic research institute, the National Bureau of Economic Research (NBER).

The NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months".

Optimism on future growth

Mr Bernanke predicted that the tricky first half of 2008 would be followed by an upturn in the second half of 2008 and throughout 2009.

That will be helped by the cuts in interest rates that have already been made and the government's $168bn (£85bn) stimulus package, which will give tax rebates to individuals and tax breaks to businesses in the summer.

The Federal Reserve's interest-rate setters begin their next two-day meeting on 29 April.

Rates have already been reduced to 2.25%, a drop of more than half since August 2007.

Bear Stearns

Asked about the treatment of Bear Stearns, Mr Bernanke said that the Federal Reserve had helped JPMorgan Chase buy its struggling rival in order to avert a "chaotic" situation.

"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," he said.

Members of the committee questioned why a big financial institution should be helped more than struggling homeowners.

"We did not bail out Bear Stearns," he said. "Bear Stearns shareholders took a very significant loss.

"I don't think any company is interested in repeating the experience of Bear Stearns."

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