April 3rd, 2008
08:20 AM GMT
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Okay, he's finally admitted it. Ben Bernanke, chairman of the Federal Reserve says a recession is possible. In his most blunt assessment of the U.S. economy yet he said it "will not grow much, if at all over the first half of 2008 and could even contract slightly."

He knows the weight his words can carry in terms of market psychology, so even to admit the possibility of a recession is a sobering. But what took him so long to come around to what almost everyone else already knows?

There are two possible explanations. One is the Fed actually got it wrong and didn't realize how fast the economy was deteriorating, especially housing. Two, it could see things getting worse, hence the aggressive interest rate cuts, but didn't want to seem overly pessimistic because that in itself could make the situation worse, the idea that you can talk yourself into a recession.

Bernanke does see things getting better in the second half of the year and even predicts there could be above trend growth in 2009. Some are already dismissing that as wishful thinking. Here's what economist James Knightley of ING had to say, "Above trend growth suggests that the fed is looking for U.S. GDP growth in excess of 3 percent for 2009. We struggle to see this happening given that the credit crunch is still in full swing, house price and equity market falls are depressing confidence and the labor market has only just started to shed jobs."

Knightley adds: "Bernanake is talking about the effects of monetary and fiscal initiatives doing enough to stimulate activity. However, the fiscal package is nowhere big as the one implemented in the last recession and the Fed has not cut rates as far. Moreover, the economic fundamentals are arguably in worse shape so we see the risk that this downturn could last far longer."

Bernanke himself admits his forecast that the economy will improve in the second half of the year and perform even better next year contains "uncertainty."

I think before it's all over, Bernanke will have more sober assessments. Much to his discomfort and that of those in the market who are optimistic about recovery in the second half of the year.



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