INSTANT VIEW 4-Fed's Bernanke says U.S. economy could contract

NEW YORK (Reuters) - The U.S. economy could contract in the first half of this year but should then pick up as aggressive interest rate cuts stimulate growth, and financial and housing market woes recede, Federal Reserve Chairman Ben Bernanke said on Wednesday.

KEY POINTS: * Bernanke says expects economy to strengthen in second half 2008, grow at or above trend in 2009 * Bernanke says uncertainties to economic outlook high, risks remain to downside * Bernanke says interest rate cuts, liquidity measures, will help promote growth, mitigate risks * Bernanke says monetary, fiscal policies in place should support return to growth

COMMENTS:

KEVIN FLANAGAN, FIXED-INCOME STRATEGIST, GLOBAL WEALTH

MANAGEMENT, MORGAN STANLEY, PURCHASE, NEW YORK:

"You are not getting any sense from Bernanke there could be an end to this easing cycle in the near term. There has been some speculation the end April meeting could be the last rate cut, but I think (the Fed) has to prepare markets first.

"But the curve flattening trade seems to be the path of least resistance.

(For 10-year Treasury note yields gap above 2-year note yields) "175 basis points is the fulcrum to the whole yield curve trade: we could trade 20 basis points either side of this through the month of April."

ALAN RUSKIN, CHIEF INTERNATIONAL STRATEGIST, RBS GREENWICH,

GREENWICH, CONNECTICUT:

"On growth there is also something of a mixed bag, with a consensus like call that there will not be much growth in H1, and it may contract, but growth will strengthen in H2 and come in at or above trend in 2009. The long-term optimism flies in the face of most asset deflation cycles when growth lingers below trend for a prolonged period. Unfortunately for Bernanke such long-term optimism if mirrored in the market would limit long-term rates coming down even if it is supportive for equities.

"In general I would cast the headlines as indicative of a poor short-term outlook that adds little fresh and perhaps optimism in the longer-term that is questionable, and too forward looking to trade off."

JOHN PRAVEEN, CHIEF INVESTMENT STRATEGIST, PRUDENTIAL

INTERNATIONAL INVESTMENTS ADVISERS, NEWARK, NEW JERSEY:

"The comments are not exactly startling. The markets have already priced in a recession. A lot of people think that we are as close to a recession as we can get ... This is not news. It's basically a concession from the Fed about what markets have been pricing in.

"Let's not be mistaken though that there are still a lot of problems out there in the credit markets. People have only just begun to take tentative steps toward market stability."

SEAN SIMKO, FIXED INCOME PORTFOLIO MANAGER, SEI, OAKS,

PENNSYLVANIA:

"He is talking about how much additional easing there may be, (signaling that) we may be coming near the end. There may be another 25 basis points cut in there."

"You are seeing the front end of the Treasury curve continue to sell off and pressure on those yields to move higher. The market is sensing that the Fed is coming to an end of easing. Rates may remain low for a long period of time."

CARL LANTZ, U.S. INTEREST RATE STRATEGIST, CREDIT SUISSE, NEW

YORK:

"I think the focus is getting the rate cuts that are already in the pipeline to work their way through, via things like the TSLF that will help mortgage rates to come down."

"It fits with a curve flattening view, the idea that the Fed is close to the end. He's highlighting the idea that these liquidity provisions help increase the efficacy of monetary policy."

"He's not really talking about slashing rates to 1 percent. It's more consistent with one or two more cuts to get rates to 2 or 1.75 percent."

BRIAN DOLAN, CHIEF CURRENCY STRATEGIST, FOREX.COM, BEDMINSTER,

NEW JERSEY:

"He is basically pointing to potential recession in the first half, he still anticipating further weakness in the housing sector and as well as a higher unemployment rate. These are a bit of a reality check for the premature optimism that the market expressed yesterday for the first day of the month.

"What we are seeing is basically is the dollar coming off against the majors. It's a dose of reality coming from the Fed Chairman that we are still looking at a very weak economic outlook in the very near-term. But at the same time he is still sticking to a very upbeat outlook for the second half of the year and in 2009. He is not as negative as he could be. In that sense I am not certain how long the dollar weakness is going to last."

NICK BENNENBROEK, HEAD OF CURRENCY STRATEGY, WELLS FARGO, NEW

YORK:

"The one headline that may be influencing the dollar is the comment that the economy may contract slightly in the first half. It appears to be the closest the Fed has come to saying the economy could contract. We've had a heavy menu of events this week, and I would say that there is still potential for dollar moves in both directions. ADP helped the dollar today but Bernanke seems to be hurting the dollar. But I don't think ADP was far enough off forecasts to alter the broad picture of slower U.S. employment or the March payrolls outlook."

MICHAEL MORAN, CHIEF ECONOMIST, DAIWA SECURITIES AMERICA, NEW

YORK:

"There was nothing surprising in Chairman Bernanke's assessment of the economy. It was consistent with the statements and minutes from the meetings of the Fed's Federal Open Market Committee. The only thing that seemed a little bit different is that he mentioned a likely increase in the unemployment rate. He also focused a good bit on inflation, but he did that because earlier in the year when the Fed did not talk about inflation, inflation expectations started to move higher."

MARKET REACTION: * BONDS: U.S. Treasuries debt prices hold losses on the day * CURRENCIES: The dollar pares gains against yen and euro * STOCKS: U.S. stock indexes extend opening losses after Bernanke