Fear of recession to cloud U.S. stocks

By Herbert Lash

NEW YORK (Reuters) - Fear of recession, stoked by rising unemployment and quickening inflation, will weigh on the stock market next week as investors look for clues from Federal Reserve Chairman Ben Bernanke about how he will address a deteriorating U.S. economy.

With a growing body of data pointing to a bigger economic downturn than previously expected and oil prices passing $100 a barrel investors will scour a speech by Bernanke on Thursday for his view on interest rates.

U.S. stocks tumbled on Friday on a Labor Department report that outlined weak job growth and rising unemployment in December. The Dow Jones industrial average is off 3.5 percent so far in 2008, its worst three-day start of a year since 1932 during the Depression.

Following the Labor Department report, Michael Strauss, chief economist at Commonfund, said he sees a best-case scenario for economic growth of 1 percent to 1-1/2 percent growth in the fourth quarter and less than that in the first quarter.

"The risk is that it's worse than that," said Strauss, whose Wilton, Connecticut-based fund has more than $40 billion under management. "This is at a minimum a growth recession and it could be a test of the real McCoy, if the Fed stays asleep at the switch."

Critics have slammed the Fed for being slow to address a credit crunch and decline in U.S. housing prices. Strauss said the Fed should cut interest rates before its next scheduled policy-setting meeting on January 29-30. Such a move would be unusual.

"The next couple of weeks are going to be very, very interesting here. And it's possible that the Fed is going to have to deal with some very difficult decisions," he said.

Bernanke is scheduled to speak in Washington on Thursday about financial markets, the economic outlook and monetary policy.