Paulson, Bernanke: No recession in '08

Treasury secretary and Fed chairman say rate cuts and rebates should keep economy out of downturn.

NEW YORK -- Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson both acknowledged problems in the U.S. economy on Thursday, but both said they believe the nation will avoid falling into recession.

In prepared testimony before the Senate Banking Committee, the head of the central bank and the Bush administration's point man on the economy said that steps taken already this year will be able to keep the economy moving forward despite the continued downturn in housing and troubles in credit markets.

"At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt," said Bernanke in his opening statement, referring to a series of Fed interest rate cuts and a $170 billion tax rebate and stimulus plan signed by President Bush Wednesday.

But Bernanke conceded that banks are getting tighter in their lending standards, the housing and home building markets are likely to weaken further and the labor market may be softening.

"More-expensive and less-available credit seems likely to continue to be a source of restraint on economic growth," he said.

The Fed last month made two deep rate cuts: three-quarters of a percentage point at an emergency meeting, followed by half a point eight days later.

Bernanke said Thursday that the Federal Open Market Committee, its rate-setting body, was ready to act again if further economic reading justify it.

"The FOMC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Bernanke said.

Economy is 'fundamentally strong'

Paulson echoed frequent comments he's made in recent weeks that he expects slower growth but no recession, even with the problems faced by the economy.

"The U.S. economy is fundamentally strong, diverse and resilient, yet after years of unsustainable home price appreciation, our economy is undergoing a significant and necessary housing correction," he said. "The housing correction, high energy prices and capital market turmoil are weighing on current economic growth."

A number of closely watched economic readings in recent weeks, including the January jobs report and the reading on business activity in the service sector, have convinced a growing number of economists that the economy is already in recession.

Senate Banking Chairman Christopher Dodd, D-Conn., opened the hearing by saying that the economy was at the greatest risk of any time since the Sept. 11 terrorist attacks. He said further steps need to be taken, adding that the slowdown is due to a crisis of confidence among both consumers and investors.

Dodd was critical of some of the Bush administration's housing efforts, including the freeze on foreclosures announced this week by Paulson and some of the country's leading mortgage lenders.

"It is a lifeline more to lenders than to borrowers in my view," said Dodd.

Sen. Richard Shelby of Alabama, the ranking Republican on the committee, also said he's concerned about the state of the economy and pointed out that surveys show economists believe the chance of a recession now stands at close to 50-50.

"One thing that is now clear to all of us is the subprime mortgage problems are not contained," said Shelby.

Shelby said he had doubts whether the stimulus package would prove to be effective.

"Even if every consumer spends their $600 tax rebate, I've equated it to pouring a glass a water in the ocean and expecting it to make a difference," Shelby said. "I hope I'm wrong."