(Agencies)
Updated: 2008-04-02 22:48

WASHINGTON - Federal Reserve Chairman Ben Bernanke warned Congress on Wednesday that the economy may shrink over the first half of this year, saying "a recession is possible." Yet, he didn't offer any assurances of further interest rate cuts.

Federal Reserve Chairman Ben Bernanke, center, meets with House Minority Leader John Boehner of Ohio, left, and House Minority Whip Roy Blunt of Mo., Tuesday, April 1, 2008, on Capitol Hill in Washington. [Agencies]

Bernanke's testimony to the Joint Economic Committee was a much more pessimistic assessment of the economy's immediate prospects amid a trio of crises - housing, credit and financial.

It now appears likely that gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly," Bernanke told lawmakers. GDP measures the value of all goods and services produced within the United States and is the best barometer of the United States's economic health. Under one rule, six straight months of declining GDP, would constitute a recession.

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Still, Bernanke said that he expects more economic growth in the second half of this year and into 2009, helped by the government's $168 billion stimulus package of tax rebates for people and tax breaks for businesses as well as the Fed's aggressive reductions to a key interest rate. Nevertheless, the chairman acknowledged uncertainty about the Fed's next steps, notwithstanding the mounting economic woes.

"Much necessary economic and financial adjustment has already taken place, and 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.

To try to limit the damage, the Federal Reserve has aggressively cut a key interest rate, now at 2.25 percent, to spur buying and investing by individuals and businesses. At the Fed's last meeting in March, however, two members dissented from the Fed's decision to sharply cut rates, showing a rare division in the often unified front the Fed shows the public. The dissenting officials, who had reputations for being extra concerned about inflation, favored a smaller reduction. Although Bernanke said he hopes inflation will moderate in coming quarters, he acknowledged that high energy prices have clouded the inflation outlook.

Nonetheless, many economists had predicted the Fed might drop it key that rate again when it next meets April 29-30.

On Wall Street, stocks dropped after the Fed chief's remarks. The Dow Jones industrials lost more than 40 points in morning trading.

Housing, credit and financial woes are threatening to push the country into a deep recession. The situation has emerged as a top concern for presidential contenders and a hot-button issue for Congress. It has thrust the White House and the Fed in crisis-management mode.

Faced with mounting home foreclosures and job losses, Bernanke has been under immense political and public pressure to provide relief and help turn around a faltering economy.

Committee Chairman Sen. Charles Schumer, D-N.Y., peppered Bernanke with questions about the Fed's moves to aid once mighty Wall Street firm Bears Stearns and then juxtaposed that with - what he believed was a lack of help - to millions of people at risk of losing their homes.

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