"It now appears likely that (the economy) will not grow much, if at all, over the first half of 2008 and could even contract slightly," Bernanke told the congressional Joint Economic Committee. While saying he expects activity to pick up in the second half and into 2009, he warned the outlook is quite uncertain and risks are skewed toward the downside.

"We are fighting against the wind," Bernanke said. He said a recession is possible, noting that recession is a technical term and the National Bureau of Economic Research, the arbiter of economic cycles, uses a complex set of criteria to determine when recessions occur.

In his first extended comments on the matter, Bernanke staunchly defended the central bank's mid-March decision to broker the emergency sale of investment bank Bear Stearns (BSC) to JPMorgan Chase (JPM), including providing a loan backed by $30 billion of Bear Stearns assets.

Given "exceptional pressures" on the global economy and financial system, the damage caused by a Bear Stearns default could have been "severe and extremely difficult to contain," Bernanke said. He said the move was not a bailout, but an effort to protect the broader economy.

"We did not bail out Bear Stearns," Bernanke said.

He told the committee that the Fed, which does not directly regulate Bear Stearns, had just 24 hours' notice that the nation's fifth largest investment bank would file for bankruptcy without new financing. If Bear Stearns had defaulted, it could have meant a "chaotic unwinding" of its positions in financial markets, Bernanke said.

"Perhaps in a more robust environment we would have made a different choice," Bernanke said, adding that the Fed does not see other firms in the same distress. "The financing that we did for Bear Stearns is a one-time event. It has never happened before, and I hope it never happens again."

While Bernanke did not directly address the question of interest rate policy, the downbeat testimony did nothing to diminish market expectations that the central bank, which has slashed a key interest rate to 2.25% from 5.25% since September, is probably not done.

Brian Bethune, chief U.S. financial economist at Global Insight, predicts the Fed will cut its key interest rate target to 1.5% by July. Global Insight predicts a "fairly significant" economic pullback.

Other economists have suggested the economy is already contracting.

Bernanke's testimony comes as gross domestic product, the broadest measure of goods and services produced in the nation, rose at an anemic 0.6% annual pace in the final quarter of 2007. In recent months, employers have been shedding jobs, manufacturing has slowed and consumer confidence and spending have been shaken. Financial market turmoil has forced lenders to pull back, making it harder for consumers and businesses to get loans and blunting the impact of aggressive Fed rate cuts.

At the same time, consumer inflation has been rising, pushed up by energy and food prices. The Fed expects inflation to moderate, but Bernanke said uncertainty about the price outlook has increased.

To address the exceptional circumstances, the Fed has slashed interest rates, offered cut-rate loans to financial institutions and created a special facility with other central banks around the world to make credit available via special auctions.

Bernanke said the extraordinary Fed moves — including invoking Depression-era authority to lend to lightly regulated investment banks — had helped but "financial markets remain under considerable stress." In response to questions, he said interest rate policy was still effective and said the central bank has not run out of tools to stimulate the economy.

Bernanke expects unemployment to rise and noted that the commercial real estate market is slowing. An economic stimulus measure passed by Congress earlier this year, containing personal tax rebates and business tax breaks, should help the economy and Congress should hold off before considering additional stimulus, he said.

But Bernanke repeatedly said Congress should act to prevent housing foreclosures and make new mortgage financing easier to get. Stabilizing housing markets — where home sales and prices are plummeting — is key to stabilizing financial markets. He rejected the notion that the Fed had moved swiftly to help Wall Street, but had not done enough for Main Street, saying interest rate cuts had helped home buyers and other businesses, and Fed moves are "at least offsetting significantly the headwinds coming from these financial factors."

Lawmakers asked sharp questions about the Bear Stearns transaction, but were generally supportive of the Fed. Committee Chairman Sen. Charles Schumer, D-NY, said it was "hard to disagree with the need to take quick and dramatic action to spare our financial system of the risk of the kind of meltdown we saw in the Great Depression." Sen. Sam Brownback, R-Kan., called the Fed effort necessary.

But the hearing raised a host of broader questions about far the Fed should intervene in financial markets, whether the central bank needs greater authority to monitor investment banks and other financial firms and whether Congress and the White House should do more to shore up the economy.

Bernanke said the Fed is trying to assure there will not be a repeat of the Bear Stearns episode, which he said was sparked when the markets lost confidence in the investment bank, leaving it unable to raise short-term capital. The Fed is offering short-term financing to investment firms, has examiners on the ground to assure the loans to investment firms are sound and is pushing firms to raise more capital.

An outside company hired by the Fed has appraised the Bear Stearns assets offered as collateral for the loan and JP Morgan has agreed to bear the first $1 billion in risk. The Fed should be able to get its money back on the loan, Bernanke said.

Contributing: Wire reports

Enlarge By Win McNamee, Getty Images Fed Chairman Ben Bernanke before the Joint Economic Committee on Wednesday.

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