Credit crisis will continue, says US Fed chief

April 3rd, 2008 - 12:21 am ICT by admin  

Washington, April 2 (DPA) US Federal Reserve chairman Ben Bernanke Wednesday said the US economy could contract slightly in the first half of 2008 - the first acknowledgement by the head of the central bank that the world’s largest economy might have entered a recession. “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,” Bernanke said in testimony before the Congress.

Bernanke said the economic outlook has “weakened” in the past two months since the Fed’s last forecast at the end of January, when the central bank predicted positive but low growth in the first six months of the year.

The Fed chief warned that the mortgage crisis had limited credit availability and spilled into other lending markets beyond housing and the financial system, including student loans.

A record number of foreclosures by home owners in the past year amid a decline in home prices has led to more than $200 billion in writedowns by banks and credit lenders.

The Fed has made available some $400 billion in Treasury securities to troubled financial institutions and last month bailed out the fifth largest US investment bank Bear Stearns, effectively bankrolling its sale to JP Morgan Chase.

Bernanke said it was necessary to prevent the possible collapse of Bear Stearns to avoid wider fallout in the financial sector.

“Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain,” he said.

Bernanke said he expected growth to improve in the second half of 2008 and into 2009.

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