Recession warning by US Fed chief

Central bank chairman offers bleak assessment of the state of the economy.

    Thousands have lost their homes during the US subprime crisis [GALLO/GETTY]
    "I'm not ready to say whether or not the US economy will face such a situation."
     
    His testimony came amid more bad news for the economy, as the commerce department revealed that orders to US factories fell for a second month in a row.
     
    "It's clearly a period of very slow growth extending back to the fourth quarter of last year, and we are trying to set our policies appropriately for that situation," Bernanke said.
     
    "Our estimates are that we are slightly growing at the moment, but we think that there's a chance that for the first half as a whole, there might be a slight contraction."
     
    Subprime criticism
     
    The US central bank has carried out a number of measures in an attempt to stave off a recession and to avoid panic on global credit markets.
     
    It has lowered its target for benchmark interest rates by three percentage points to 2.25 per cent since mid-September, and offered banks hundred of billions in credit in an attempt to calm fears on international markets.
     

    The subprime crisis has sparked panic
    in world markets [EPA]

    Bernanke said that he expected the economy to pick up 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.
     
    The committee asked Bernanke about the bank's moves to aid Wall Street firm Bears Stearns and then contrasted that with what he said was a lack of help to millions of people at risk of losing their homes in the subprime mortgage crisis.
     
    In a controversial move, the bank backed a $29 billion rescue package as part of JP Morgan's deal to take over the troubled Bear Stearns, the nation's fifth largest investment firm, which was on the brink of bankruptcy.
     
    Bear Stearns had invested heavily in subprime or high interest mortgages with the collapse of the housing market.
     
    "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," he said.
     
    US banks have reported losses of tens of billions of dollars after offering loans that were not repaid.
     
    The crisis has also affected international lenders who bought into or offered subprime loans in the US and contributed to bouts of chaos on international financial markets.

    SOURCE: Agencies


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