Paulson, Bernanke: No recession in '08

Treasury secretary and Fed chairman say rate cuts and rebates should keep economy out of downturn.

Treasury Secretary Henry Paulson, left, and Fed Chairman Ben Bernanke believe the U.S. will avoid a recession.

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

In prepared testimony before the Senate Banking Committee, the head of the central bank and the Bush administration's point man on the economy said that steps taken already this year will be able to keep the economy moving forward despite the continued downturn in housing and troubles in credit markets.

"At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt," said Bernanke in prepared remarks, referring to a series of Fed interest rate cuts and a $170 billion tax rebate and stimulus plan signed by President Bush Wednesday.

The Fed last month made two deep rate cuts: three-quarters of a percentage point at an emergency meeting, followed by half a point eight days later.

Bernanke said Thursday that the Federal Open Market Committee, its rate-setting body, was ready to act again if further economic reading justify it.

"The FOMC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Bernanke said.

Paulson echoed frequent comments he's made in recent weeks that he expects slower growth but no recession, even with the problems faced by the economy.

"The U.S. economy is fundamentally strong, diverse and resilient, yet after years of unsustainable home price appreciation, our economy is undergoing a significant and necessary housing correction," he said in his prepared remarks. "The housing correction, high energy prices and capital market turmoil are weighing on current economic growth."

A number of closely watched economic readings in recent weeks, including the January jobs report and the reading on business activity in the service sector, have convinced a growing number of economists that the economy has already into recession.

Senate Banking Chairman Christopher Dodd, D-Conn., opened the hearing by saying that the economy was at the greatest risk of any time since the Sept. 11 terrorist attacks. He said further steps need to be taken, adding that the slowdown is due to a crisis of confidence among both consumers and investors.