Bernanke: Economy Could Shrink in 1st Half 2008

WASHINGTON(Reuters) – The U.S. economy could contract in the first half of thisyear but should then pick up as aggressive interest rate cuts stimulategrowth and financial and housing market woes recede, Federal ReserveChairman Ben Bernanke said on Wednesday.

"It now appears likely that real gross domestic product will notgrow much, if at all, over the first half of 2008 and could evencontract slightly," he said in remarks prepared for delivery to thecongressional Joint Economic Committee.

"We expect economic activity to strengthen in the second half of theyear, in part as the result of stimulative monetary and fiscalpolicies; and growth is expected to proceed at or a little above itssustainable pace in 2009," he added.

The central bank chief appears before Congress slightly more thantwo weeks after the Fed provided emergency funding to prevent thefailure of troubled investment bank Bear Stearns, which he said couldhave caused a "chaotic" market reaction that would have been difficultto contain.

Bernanke said financial markets remain under considerable strain butemergency liquidity measures have been helpful in alleviating some ofthe stresses. Funding pressures on large financial institutions seem tohave eased somewhat, and some markets, including the key market foragency mortgage-backed securities, appear to be more liquid.

"Much necessary economic and financial adjustment has already takenplace, and monetary and fiscal policies are in train that shouldsupport a return to growth in the second half of this year and nextyear," he said. "I remain confident in our economy’s long-termprospects."

(Reporting by Mark Felsenthal and Alister Bull; Editing by James Dalgleish)