US economy may shrink in H1 2008: Bernanke

Federal Reserve Chairman Ben Bernanke warned that the US economy may shrink over the first half of this year, which would signal the start of a recession. Bernanke didn't use the "R" word ? Recession. But it's the closest he has come so far to suggesting that possibility, given a trio of crises -- housing, credit, and financial. Interestingly, he didn't offer assurances of further interest rate cuts.

The Fed Chairman was testifying before the Joint Economic Committee. Bernanke said he expects little if any growth in 2008. "The economy could contract slightly but should strengthen in the second half and resume growth in 2009. Global growth will slow reducing commodity prices."

According to Bernanke, Fed rate cuts will help promote growth and lessen risks. He, however, cautioned that inflation is a source of concern. "The decline in the dollar has contributed to inflation. We expect inflation to moderate in the coming quarters."

The effect of Bear Stearns would have been felt broadly in the real economy, he said. "Bear Stearns action preserved integrity of financial system."

Bernanke said lending to investment banks is being done with increased scrutiny. The pressures in short-term bank funding have eased somewhat, he added.

Global financier and philanthropist, George Soros, who is Chairman of Soros Fund Management, said he doesn't think US markets are halfway through the fall out. He said expansionary forces will counterbalance US recession.

He advises investors to be cautious in the current environment.