Federal Reserve chairman Ben Bernanke has admitted the US economy could contract in the first half of this year.
While not using the ‘recession’ word, Bernanke warned US gross domestic product (GDP) could narrow in the first two quarters of the year, which would fit the assumed definition of a recession.
“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 earlier today.
The chairman explained the recent Fed interest rate cuts and emergency lending facility had helped stabilise the situation, but he says financial markets remain under “considerable stress”.
“We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies,” he says.
“However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside.”
On Bear Stearns, Bernanke says the beleaguered investment bank informed the Fed on 13 March it would have to file for ‘Chapter 11 bankruptcy’ the following day unless alternative fund sources became available.
Bernanke says the Federal Reserve therefore agreed to provide funding to Bear Stearns through JPMorgan Chase.
“Normally, the market sorts out which companies survive and which fail, and that is as it should be,” he says.
“However, the issues raised here extended well beyond the fate of one company. Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets.
“With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence.”
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