Bernanke Believes U.S. Will Avoid Recession

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

In prepared remarks to the Senate Banking Committee Thursday, Bernanke told Congress the nation's economic outlook has deteriorated and indicated that the central bank is ready to keep lowering key interest rates as needed.

"The outlook for the economy has worsened in recent months, and the downside risks to growth have increased," Bernanke said. "To date, the largest economic effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so."

Bernanke also said the one-two punch of the housing and credit crises has greatly strained the economy.

He noted that new hiring has slowed and said that people are likely to tighten their belts further as they are pinched by high energy prices and sagging home values.

"Conditions in the labor market have also softened. Payroll employment, after increasing about 95,000 per month on average in the fourth quarter, declined by an estimated 17,000 jobs in January," Bernanke said.

Bernanke and Paulson have been fighting to keep the economy afloat. Foreclosures have climbed to record highs, financial companies have racked up multibillion-dollar losses from soured mortgage investments, Wall Street has convulsed, and employers have turned cautious in their hiring.

Economic growth practically stalled in the final three months of last year, and some economists believe it may actually be contracting now. By one rough rule of thumb, a recession occurs when there are two consecutive quarters -- six straight months --when the economy shrinks.