April 2 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke acknowledged for the first time that a U.S. recession is possible because homebuilding, unemployment and consumer spending will deteriorate.
``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 said in testimony to Congress's Joint Economic Committee today. He also told lawmakers the Fed's emergency loan to Bear Stearns Cos. followed a March 13 warning by the company it ``would have to file for Chapter 11 bankruptcy the next day.''
Bernanke, making his first extensive public comments since the Fed's decisions two weeks ago to back the takeover of Bear Stearns and lower interest rates by 0.75 percentage point, is trying to fend off criticism of the deal while struggling to prevent a deeper economic slump. He said he thought ``long and hard'' about the decision, and hopes not to undertake a similar rescue again.
While the Fed expects the economy to return to its long-term growth pace in 2009, ``in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside,'' he said.
Treasury notes were little changed after Bernanke's remarks. The benchmark 10-year note yielded 3.55 percent at 10:06 a.m. in New York, about the same as late yesterday. Stocks fell.
``This is a much more pessimistic assessment of the economy than what the Fed had three months ago or six months ago,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, who previously worked as a senior economist in Congress. ``Certainly, the Fed and the capital markets have been surprised the economy has slowed so quickly.''
Emergency Move
The Fed, in an emergency decision on Sunday, March 16, voted to authorize a loan against $29 billion of Bear Stearns assets, including mortgage-backed securities, so JPMorgan Chase & Co. would buy the company. The central bank also expanded its powers by opening up lending directly to Wall Street investment banks. In addition, the Fed cut the interest rate on loans to banks, and now securities firms, by a quarter point.
Two days later, the Federal Open Market Committee cut the main lending rate to 2.25 percent and said the ``outlook for economic activity has weakened further.'' Officials also showed renewed concern about inflation, making a smaller reduction than traders anticipated. Two policy makers dissented in favor of ``less aggressive action.''
The Fed agreed to the emergency Bear Stearns loan to ``prevent a disorderly failure'' of the company and the ``unpredictable but likely severe consequences of such a failure for market functioning and the broader economy,'' Bernanke said.
Bear Collateral
The Fed hasn't disclosed details of the Bear Stearns assets taken as collateral. The Treasury Department has said that they include mortgage bonds and ``related hedge investments'' and that any losses may reduce the Fed's contribution to Treasury's general fund, according to documents released yesterday.
The Banking Committee and Senate Finance Committee have launched separate inquiries into the transaction, raising questions about the role of the regulators in facilitating it.
The Fed set up a new company to manage and sell $30 billion of Bear Stearns assets and hired BlackRock Inc. for that purpose. The Fed last week said JPMorgan will shoulder the first $1 billion of any losses.
``With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions'' and ``could have severely shaken confidence,'' the Fed chief said.
`Difficult Period'
Bernanke said that the U.S. economy is ``going through a very difficult period.''
The U.S. economy grew at an annual pace of 0.6 percent from October to December. Growth probably slowed to a 0.2 percent annual rate in the first quarter, according to the median estimate of analysts surveyed by Bloomberg News.
``Monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year,'' Bernanke said. Policy makers expect that the rate cuts and financial-market actions this year ``will help to promote growth over time and to mitigate the risks to economic activity.''
He didn't repeat the expectation of ``moderate growth'' from the FOMC's March 18 statement.
Traders expect the Fed to lower the overnight interbank lending rate by a quarter-point at the next FOMC meeting April 29-30, based on futures prices.
IMF Cuts Forecast
Separately today, the International Monetary Fund cut its forecast for global growth this year and said there's a 25 percent chance of a world recession, citing the worst financial crisis in the U.S. since the Great Depression. Also, orders to U.S. factories fell more than forecast in February, a Commerce Department report showed.
Treasury Secretary Henry Paulson told Bloomberg Television in an interview from Beijing that the IMF numbers appear ``overblown to me.'' He indicated a willingness to consider congressional plans to stem foreclosures by expanding government guarantees for mortgages.
Bernanke said that inflation ``has also been a source of concern,'' with higher commodity prices and the weaker dollar. At the same time, he said the Fed expects inflation to ``moderate in coming quarters,'' echoing the FOMC statement. A ``leveling out'' of commodity prices and slower global growth will help, Bernanke said.
Inflation `Edged Down'
The Fed's preferred inflation gauge, which excludes food and energy costs, has increased at least 2 percent from the year earlier, the upper end of officials' long-term projections, for five straight months through February. Bernanke said the rate ``has edged down recently after firming somewhat late last year.''
Senator Charles Schumer, the New York Democrat who chairs the House-Senate panel, said today that the Fed's actions on Bear Stearns ``provided some much needed breathing room to the financial markets,''
``But there are many legitimate, looming, and unanswered questions about what happened both before and after the Bear Stearns action,'' Schumer said.
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