Wednesday, April 2, 2008

Bernanke Admits US Recession Possible

Good late morning everyone. I wanted to listen to Fed chairman Bernanke's testimony before commenting today. His comments on where the US economy is headed:

``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."

I was wondering if he would use the R word. He decided to tap dance around it. This is as close as the Fed has come to admitting that we are in a recession. What I found more interesting were his comments on where the US economy will be heading into 2009. He still thinks the economy should level out in the second half of 2008 with the stimulus package although he sounded less optimistic then his previous testimony. However, he seemed to hedge his bet on his 2009 forecast with this statement:

"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.

A take from one Wachovia economist on the speech:

``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.''

The Fed usually tries to paint a rosy picture when they sit in front of Congress. I have predicted that this recession will be a long one. Bloomberg reported yesterday that the banking sector could show losses for the next 10 quarters. I believe it would be hard to call a
"bottom" like the pundits have this week when even the Fed says this crisis could spread into 2009. The speed of this slowdown looks to have surprised the Fed.

Bernanke said housing continues to be the big drag on the economy. He also seems concerned about inflation:

"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."

Well Ben maybe if you hadn't slashed interest rates so fast this wouldn't be a problem. Obviously the Fed sees tough times ahead and have admitted for the first time that they are not as confident about 2009. Take yesterdays rally with a grain of salt. The issues we face from housing and struggling banks will take years to straighten out IMO.

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