Ben Bernanke, Chairman of the US Federal Reserve, came his closest yet to conceding that the American economy may already have slipped into recession.

In gloomy testimony to Congress yesterday, Mr Bernanke admitted that the US faced a grim first half to the year thanks to its housing slump and the global credit crunch. “It now appears likely that GDP will not grow much, if at all, over the first half of 2008 and could even contract slightly. . . Clearly, the US economy is going through a very difficult period,” he told the Joint Economic Committee.

However, asked whether he believed that America was now in recession, he sidestepped the question: “Recession is possible, but recession is a technical term. . . I’m not ready to say whether or not the US economy will face such a situation.”

“It’s clearly a period of very slow growth extending back to the fourth quarter of last year, and we are trying to set our policies appropriately for that situation,” Mr Bernanke added.

“Our estimates are that we are 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.”

Despite his bleak assessment of immediate prospects, Mr Bernanke did little to buoy market hopes that the Fed would follow up on its recent, aggressive cuts in interest rates with further, early moves. The Fed’s policy-making Open Market Committee next meets to decide rates on April 30.

Instead, he dampened optimism that fresh rate cuts were a “done deal” by predicting that the Fed’s past action should have set the stage for some US recovery in the second half, and pointing to persistent inflation as a “source of concern”. Some measures of future inflation expected by businesses and consumers had risen, he noted, while uncertainty about the inflation outlook had increased.

The Fed chief said that, bolstered by the central bank’s cuts in official interest rates to just 2.25 per cent, and the Government’s $168 billion stimulus package of tax rebates, the world’s biggest economy should revive in the autumn. “Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth,” he said.

“We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies.”

However, he also acknowledged that the economic landscape was strewn with risks that threaten this scenario for recovery.

While the Fed’s groundbreaking measures to pump extra liquidity into money markets had appeared “to have helped stabilise the situation somewhat”, Mr Bernanke did little to quell fears that the credit crisis is worsening. He emphasised that financial markets remained “under considerable stress”.

Credit was restricted because of large losses and writedowns at many financial institutions, and lenders were still wary of providing capital in the interbank market, he noted. Nonfinancial businesses, however, continued to have strong balance sheets and were not facing liquidity problems. While the market for mortgages conforming to federal standards had begun to recover, nonconforming mortgages still faced market problems.

The Fed chairman came under intense questioning from Democratic Congress members over the decision to rescue Bear Stearns, the stricken investment bank. Mr Bernanke defended the moves, and the Fed’s provision of $30 billion for JP Morgan Chase to take over Bear. “With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence,” he said. “The damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain. . . We did not bail out Bear Stearns. We did what. . . was necessary to maintain the integrity and viability of the financial system.”

While Mr Bernanke said the financial risk to the Fed in taking on suspect securities as collateral for its lending over the Bear rescue was nowhere near the potential $29 billion on its books (JP Morgan would shoulder the first $1 billion of any losses), he told the committee: “I'd hope not to ever do it again.”

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