Federal Reserve Chairman Ben Bernanke told members of Congress this morning (April 2), "It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly."
Though he did not use the word "recession," his statement was the first from a Fed official that openly acknowledged the potential for one. A recession is generally defined as two consecutive quarters of negative GDP growth.
"Although our recent actions appear to have helped stabilize the situation somewhat, financial markets remain under considerable stress," said Bernanke. He noted that mortgage money for traditional conforming loans was widely available, but said "the nonconforming segment of the mortgage market continues to function poorly."
Bernanke predicted that residential construction would continue to contract "somewhat further in coming months" as builders continue to focus on inventory reduction. "We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies; and growth is expected to proceed at or a little above its sustainable pace in 2009, bolstered by a stabilization of housing activity, albeit at low levels, and gradually improving financial conditions."
The Fed chief also recapped for Congress the recent actions that have been taken in an attempt to stabilize the falling economy, including the wide expansion of its its auction and discount window credit facilities. The Fed's Open Market Committee dropped its benchmark federal funds rate by a total of 125 basis points in January and an additional 75 basis points in March, putting the current rate at 2-1/4 percent. "We anticipate that these actions, together with the steps we have taken to foster market liquidity, will help to promote growth over time and to mitigate the risks to economic activity," he said.
He did not address in his prepared remarks whether the FOMC will consider lowering its target interest rates further at its meeting later this month, but he said, "Inflation has also been a source of concern. We expect inflation to moderate in coming quarters. That expectation is based, in part, on futures markets¹ indications of a leveling out of prices for oil and other commodities, and it is consistent with our projection that global growth--and thus the demand for commodities--will slow somewhat during this period. "
He added, "However, some indicators of inflation expectations have risen, and, overall, uncertainty about the inflation outlook has increased."
Bernanke also seemed to attempt to head off criticism from some members of Congress of the Fed's action to provide liquidity to Bear Stearns and broker the sale of the firm to JP Morgan Chase, a deal which some members view as a corporate bailout even though the Fed took back mortgage back securities as collateral for the funds it provided. "On March 13, Bear Stearns advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and that it would have to file for Chapter 11 bankruptcy the next day unless alternative sources of funds became available," said Bernanke. "This news raised difficult questions of public policy. Normally, the market sorts out which companies survive and which fail, and that is as it should be. However, the issues raised here extended well beyond the fate of one company."
He continued, "Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain. Moreover, the adverse effects would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability. To prevent a disorderly failure of Bear Stearns and the unpredictable but likely severe consequences of such a failure for market functioning and the broader economy, the Federal Reserve, in close consultation with the Treasury Department, agreed to provide funding to Bear Stearns through JPMorgan Chase."