Bernanke: Recession is not on the horizon
Interest rate drop unlikely as inflation worries persist

Associated Press | March 29, 2007

WASHINGTON -- Federal Reserve chairman Ben Bernanke doesn't believe the nation will slip into a recession, and he rejects the notion raised by his predecessor, Alan Greenspan, that the economy's expansion could be in danger of fizzling out.

But the good news for investors stops there.

Bernanke said yesterday that Wall Street jumped too far last week in thinking that Fed policy makers had signaled interest rates might drop. That new comment sent stocks spiraling downward.

The Fed chief testified on Capitol Hill amid growing concerns that problems with risky mortgages and a painful housing slump could send the economy into a tailspin. Greenspan recently said there's a one-in-three possibility of a recession this year.

But Bernanke -- while acknowledging there are risks -- told Congress's Joint Economic Committee that the Fed does not see such negative forces pushing the economy into a recession.

"I would make a point, I think, which is important, which is there seems to be a sense that expansions die of old age, that after they reach a certain point, then they naturally begin to end," Bernanke said. "I don't think the evidence really supports that. If we look at history, we see that the periods of expansions have varied considerably. Some have been quite long."

Bernanke said the Federal Reserve last week changed its policy statement, which investors look to for clues about future rate moves, to gain "a bit more flexibility, given the uncertainties that we are facing and the risks that are occurring on both sides of our outlook."

There is an increased threat of higher inflation on the one hand and weaker-than-expected economic growth on the other, he said. Those economic crosscurrents can complicate the Fed's job.

But some lawmakers said the Fed should be open to cutting rates.

Senator Charles Schumer, the chairman of the Joint Economic Committee and a New York Democrat, weighed in: "Another reason to be open to an easing of monetary policy is the concern that the housing market adjustment is far from over."