Ben Bernanke, chairman of the U.S. Federal Reserve, said in his testimony on Capital Hill on Wednesday morning that the near-term economic outlook has weakened. He believes that gross domestic product, after accounting for inflation, could contract slightly in the first half of 2008.
Does that mean a recession is imminent? Maybe not.
"We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies; and growth is expected to proceed at or a little above its sustainable pace in 2009, bolstered by a stabilization of housing activity, albeit at low levels, and gradually improving financial conditions," he said in his prepared testimony. "However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside.
As for inflation, he is sticking with the line that he expects it to moderate in coming quarters, which is consistent with recent statements that accompany the Fed's monetary policy notes - which could be good news for investors hoping for additional interest rate cuts in the months ahead.
"That expectation is based, in part, on futures markets' indications of a leveling out of prices for oil and other commodities, and it is consistent with our projection that global growth - and thus the demand for commodities - will slow somewhat during this period," Mr. Bernanke said.
U.S. investors didn't take kindly to this assessment, presumably because the prospect of a recession is still scary. The Dow Jones industrial average fell 28 points in early trading, or 0.2 per cent, to 12,626. Citigroup Inc. rose 1.5 per cent, but JPMorgan Chase & Co. fell 0.9 per cent.
However, Canada's S&P/TSX composite index shot up 90 points, or 0.7 per cent, to 13,531. There, most sectors were doing well, including financials, materials and energy. Barrick Gold Corp. rose 3 per cent, Royal Bank of Canada rose 0.5 per cent and EnCana Corp. rose 0.9 per cent.