Federal Reserve Chairman Ben Bernanke said on Tuesday that the economy could possibly slip into recession later this year but would quickly rebound in the second half of the year.
Bernanke was testifying before lawmakers of the Joint Economic Committee in Washington only slightly more than a week after the Fed engineered the sale of struggling investment bank Bear Stearns.
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, he said in a prepared statement.
During a question and answer session afterwards, Bernanke attempted to clarify.
A recession is possible. But a recession is a technical term defined by the National Bureau of Economic Research depending on data which will be available quite a while from now, so I'm not yet ready to say whether or not the U.S. economy will face such a situation.
Bernanke added that the economy had adapted as it faces a very difficult period. He said the policy moves made during the crisis will help the economy bounce back.
Bernanke also defended the Fed's move to rescue Bear Stearns by loaning the investment bank over $30 billion to improve its liquidity. He said that Bear Stearns was on the verge of bankruptcy.
Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets, he said. 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.
Bernanke is scheduled to give more detailed answers to the Bear Stearns deal tomorrow.