Fed’s Bernanke says the ‘R’ word
Posted on Thursday, April 3, 2008
WASHINGTON — Federal Reserve Chairman Ben Bernanke offered Congress an unflinching — and more pessimistic — assessment Wednesday of potential damage to the national economy.
“A recession is possible,” said Bernanke, who is under immense political and public pressure to turn things around. “Our estimates are that we’re slightly growing at the moment, but we think that there’s a chance that for the first half, as a whole, there might be a slight contraction.”
Generally, two consecutive quarters of a shrinking economy constitute a recession, but Bernanke wasn’t getting into that. “A recession is a technical term,” he said. “I’m not yet ready to say whether or not the U. S. economy will face such a situation.”
Meanwhile, Treasury Secretary Henry Paulson was urging Chinese leaders Wednesday in Beijing to move ahead with financial-market changes, even though the American credit crisis might make them hesitant.
Paulson met with Chinese President Hu Jintao and Wang Qishan, Beijing’s new point man on trade ties with Washington. Paulson said he assured them Washington is resolving its credit crisis but cautioned it is not over and there would be “more bumps in the road.”
“There is no doubt that what is happening in the U. S. markets clearly has to give the Chinese pause,” Paulson told reporters. “They may be too polite to say that directly. But it clearly has to be giving them pause.”
Paulson, who was in Beijing as part of a U. S.-Chinese dialogue on trade and other contentious issues, said the two sides discussed financial changes, though he declined to say what Chinese officials said.
Even if the U. S. economy has not fallen into its first recession since 2001 — and many economists believe it has — the housing debacle and other economic woes are a major concern for homeowners, job losers and investors. That means they’re a concern for Congress and the presidential contenders, too.
Hoping to limit damage, the Federal Reserve has been slashing interest rates since the start of the year to get people and companies spending again. “We are fighting against the wind,” Bernanke said, “at least offsetting significantly the head winds coming from these financial factors.”
But he didn’t offer a clear signal about the Fed’s interest-rate intentions from here on.
At the last meeting of the central bank’s policymakers in March, two members dissented from the decision to sharply cut rates. Those officials, who have reputations for being extra vigilant about fighting inflation, are concerned that cutting rates too much or too quickly could damage the economy by pushing prices higher. Although Bernanke said he hopes inflation will moderate in coming quarters, he said high energy prices have clouded the outlook.
Still, economists believe the Fed probably will drop its key rate again at its next meeting at the end of this month. Some analysts predicted the Fed’s key rate would fall as low as 1. 50 percent this year, from the current 2. 25 percent.
Bernanke urged Congress to take additional steps to bolster the housing market and to aid people in danger of losing their homes. But he refused to be pinned down on making specific recommendations in other areas, such as how to help struggling state governments hit by the crisis. That exasperated Sen. Edward Kennedy, D-Mass., who pleaded: “What are we going to tell the states ?.... The states are in a critical situation.”
Besides lowering interest rates, the Fed has taken a series of extraordinary steps in recent weeks and months to prop up the nation’s financial system, which has been in a state of high jeopardy.
In a controversial move, the Fed backed a $ 29 billion lifeline as part of JP Morgan Chase’s deal to take over the troubled Bear Stearns, the nation’s fifth-largest investment house, which was on the brink of bankruptcy. Bear Stearns had invested heavily in risky mortgage-backed securities that eventually soured with the collapse of the housing market.
That brought criticism from Democrats and others who contend the Fed is bailing out Wall Street and putting billions of taxpayer dollars at potential risk.
Bernanke defended the move as necessary to avert a meltdown in the entire financial system. “The damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain,” he said. The Fed’s unprecedented involvement was meant as a one-time event. “It has never happened before, and I hope it never happens again,” he told lawmakers.
Although the taxpayers are on the hook for the $ 29 billion, Bernanke believed they wouldn’t suffer any losses. “I feel reasonably confident that we will be able to recover all of the principle and indeed some interest, and there is some chance of even upside beyond that.”
To also ease the credit crisis, the Fed — in the broadest use of its lending authority since the 1930 s — agreed to temporarily let big investment firms obtain emergency financing.
Bernanke said the Fed “never lost a penny” in the past from various lending maneuvers.
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