WASHINGTON (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.
“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,” he said in remarks prepared for delivery to the congressional Joint Economic Committee.
“We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies; and growth is expected to proceed at or a little above its sustainable pace in 2009,” he added.
The central bank chief appears before Congress slightly more than two weeks after the Fed provided emergency funding to prevent the failure of troubled investment bank Bear Stearns BSC.N, which he said could have caused a “chaotic” market reaction that would have been difficult to contain.
Bernanke said financial markets remain under considerable strain but emergency liquidity measures have been helpful in alleviating some of the stresses. Funding pressures on large financial institutions seem to have eased somewhat, and some markets, including the key market for agency mortgage-backed securities, appear to be more liquid.
“Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year,” he said. “I remain confident in our economy’s long-term prospects.”
Reporting by Mark Felsenthal and Alister Bull; Editing by James Dalgleish