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.