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Fri, Mar 30, 2007 - Page 10 News List

Fed's Bernanke does not expect recession for US


The head of the US Federal Reserve (Fed) said on Wednesday that he does not believe the US economy will slip into a recession. Chairman Ben Bernanke also rejected the notion raised by his predecessor, Alan Greenspan, that the US' economic expansion could be in danger of fizzling out.

But the good news for investors stops there.


Bernanke suggested on Wednesday that Wall Street jumped too far last week in thinking that Fed policymakers had signaled interest rates might drop. That new comment sent stocks spiraling downward. The Dow Jones industrials lost 96.93 points to close at 12,300.36.

The Fed chief testified on Capitol Hill amid growing concerns that problems with risky mortgages and a painful housing slump could send the US economy into a tailspin. Greenspan, who left the Fed last year, recently said there was a one-in-three possibility of a recession this year.


In remarks that contributed to a gut-wrenching 416-point plunge in the Dow Jones industrial average on Feb. 27, Greenspan suggested the expansion, now in its sixth year, could be in danger of petering out.

But Bernanke -- while acknowledging there are risks -- told Congress' Joint Economic Committee that the Fed does not see such negative forces pushing the economy into a recession.

"I would make a point, I think, which is important, which is there seems to be a sense that expansions die of old age, that after they reach a certain point, then they naturally begin to end," Bernanke said.

"I don't think the evidence really supports that. If we look at history, we see that the periods of expansions have varied considerably. Some have been quite long," he said.


Bernanke said that the Federal Reserve last week changed its policy statement -- which investors look to for clues about future rate moves -- to gain "a bit more flexibility, given the uncertainties that we are facing and the risks that are occurring on both sides of our outlook."

There is an increased threat of higher inflation on the one hand and weaker-than-expected economic growth on the other, he said.

Those economic crosscurrents can complicate the Fed's job.


Last week the Fed again held a key interest rate steady at 5.25 percent.

But it dropped language contained in previous policy statements that had spoken only of the possibility of rate increases down the road. Wall Street rallied on that change, interpreting it as suggesting the possibility of a rate cut.

Bernanke, however, said the Fed was not trying to send a signal to markets about a possible cut or increase.

The direction of rates hinges on what incoming barometers say about the economy and inflation, Bernanke said, echoing a point also made by his central bank colleagues last week.

Still, he said the Fed's predominant concern continues to be inflation.

Bernanke, meanwhile, stuck with the Fed's assessment that the US economy is likely to grow at a moderate pace over the coming quarters.


He also repeated the belief that inflation also should ease in the months ahead, but he warned that underlying inflation remains "uncomfortably high."

To be sure, Bernanke was careful to hedge the Fed's economic bets.

The housing slump could turn out to be worse than expected, which could further dampen economic growth.

A job market that is producing fatter paychecks could push up inflation.

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