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WASHINGTON - The economy is suffering a "severe contraction," Federal Reserve Chairman Ben Bernanke told Congress yesterday. But he planted a glimmer of hope that the recession might end this year if the government manages to prop up the shaky banking system, and Wall Street rallied.
The economy, he said, is likely to keep shrinking in the first six months of this year after posting its worst slide in a quarter-century at the end of 2008.
Mr. Bernanke said he hopes the recession will end this year, but that forecast includes significant risks. Any economic turnaround will hinge on the success of the Fed and the Obama Administration in getting credit and financial markets to return to more normal operation.
"Only if that is the case, in my view there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery," he told the Senate Banking Committee.
That - along with the Fed chief's remarks that regulators don't intend to nationalize banks - was enough to buoy Wall Street. The Dow Jones industrials added more than 236 points and the Standard & Poor's 500 index also rose, a day after both hit their lowest levels since 1997.
Among the risks to any recovery are economic and financial troubles in other countries turning out to be worse than anticipated, which would hurt U.S. exports and further aggravate fragile financial conditions in the United States.
Another concern is that the Fed and other Washington policy makers won't be able to break a vicious circle in which disappearing jobs, tanking home values, and shrinking nest eggs are forcing consumers to cut back sharply, worsening the economy's tailspin. In turn, battered companies lay off more people and cut back in other ways.
In an effort to revive the economy, the Fed has slashed a key interest rate to an all-time low, and President Obama recently signed a $787 billion stimulus package of increased government spending and tax cuts.
Those and other bold steps should over time provide relief and promote an economic recovery, Mr. Bernanke said.
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