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WASHINGTON — Federal Reserve Chairman Ben Bernanke presented his bleakest assessment yet of the economy on Wednesday, warning a congressional committee that economic growth was likely to stagnate — and perhaps even fall into a recession — over the first half of the year.

"A recession is possible," said Bernanke. "Our estimates are that we’re slightly growing at the moment, but we think that there’s a chance that for the first half as a whole there might be a slight contraction."

However, he also said the Fed’s steps to restore confidence in the credit markets had "helped stabilize the situation somewhat" and would probably stimulate an economic recovery after the summer.

But he warned that the current turbulence made the economic outlook difficult to predict.
"The uncertainty attending this forecast is quite high and the risks remain to the downside," he said, in remarks to the Joint Economic Committee.

Overall, Bernanke said, "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."

But for the first time in months, Bernanke omitted any language suggesting the Fed was poised to extend its string of sharp interest rates cuts. He said inflation remained a serious concern, which could reduce the Fed’s flexibility to lower rates.

"We expect inflation to moderate in coming quarters," he said. But he added, "Uncertainly about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully in the months ahead."

In his testimony, Bernanke presented a laundry list of coming economic woes guaranteed payday loan. He said he expected the unemployment rate to rise, payrolls to shrink and house construction to fall.

And even after weeks of efforts to shore up confidence in the credit markets, the chairman acknowledged that banks and other financial institutions remained hesitant to lend, which was causing problems for the broader economy.

"Financial markets remain under considerable stress," Bernanke said. "The capacity and willingness of some large institutions to extend new credit remains limited."

He cited strains in a range of credit markets, including those for corporate debt, municipal bonds, student loans and government-backed mortgages.

At Wednesday’s hearings, lawmakers peppered Bernanke with questions about the legal and regulatory implications of the Fed-orchestrated bailout of investment bank Bear Stearns.

In his testimony, the chairman defended the Fed’s actions against accusations of "moral hazard," which some critics had invoked in calling for the bank to suffer the consequences for its bad bets on securities linked to subprime mortgages.

Bernake said the consequences of allowing Bear Stearns to collapse would have led to broad troubles for the credit markets and economic confidence.

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