Since the start of the global credit squeeze in mid-2007, the Federal Reserve has been cautious about suggesting US economic and financial conditions could get worse, in part for fear that markets might overreact.

Yet speaking before Congress this week, the Fed Chairman held true to his vow for greater transparency, predicting that economic growth, which slowed sharply in the fourth quarter of 2007, would not return to normal levels until at least 2010.

'While the National Bureau of Economic Research (NBER) has yet to decide to whether the US economy is in recession, Bernanke's replies have all but confirmed the economy is already in recession,' said Mr Ashraf Laidi, chief foreign exchange strategist at CMC Markets US in New York.

The NBER is considered the official arbiter of US recessions, but their calls tend to lag the actual start of a contractionary period by about three to six months.

Speaking on the US business television channel CNBC on Thursday, Mr James Poterba, the head of the Economics Department at Massachusetts Institute of Technology, who was recently named to become president of the NBER, said it is 'very hard to tell' if the United States is currently in recession.

The 2001 recession for instance, began in March of that year and persisted until November. By the time the NBER made its determination, the recession had already ended. However, judging by Mr Bernanke's account, the days of the short-lived contraction and recovery in economic growth are over for the foreseeable future.

Not only did Mr Bernanke offer a glum outlook for growth complicated by rising inflation, he also indicated that even his already depressed forecasts might be overly optimistic.

'The risks to this outlook remain to the downside,' Mr Bernanke said. 'The risks include the possibilities that the housing market or labour market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.'

It is not difficult to see how some observers might interpret strong words as these from a measured man like Mr Ben Bernanke as a sign of real concern.

'If you acknowledge a recession it's your fault, so that's one reason not to be the first to do it,' said Mr Alan Skrainka, chief market strategist at Edward Jones, in St Louis, Missouri.

The threat of a prolonged recession is not negligible. What started as a US housing market slump has since spread through the financial system like a wildfire, beginning with assets directly linked to subprime mortgages and then extending to bonds formerly deemed safe as mistrust in the banking sector soared to new heights.

Banks have since announced well over US$100 billion (S$141 billion) in related losses, a tally that is expected to triple by the time all is said in done. Against that backdrop, it's little wonder that Mr Bernanke now seemed to be facing the music.

'They feel vulnerable about the first half,' said Mr Ian Morris, chief economist at HSBC. 'They know growth in the first half might be close to zero.'

In part, Mr Bernanke's bearishness on the economy is part of the Fed's drive to keep ailing markets relatively liquid, in the knowledge that they can expect further interest rate cuts.

Yet Mr Bernanke also attempted to rein in inflation expectations by saying the central bank would remain vigilant on price pressures which have become more apparent after both producer and consumer inflation jumped in data released this month.

These developments not only complicated the Fed's task of regulating the monetary lever, but could also paradoxically worsen the economic situation. Since any possible recession is expected to be driven by a retrenchment in consumer spending, further damage to purchasing power from rising costs could force a downward spiral.

'The Fed's promise to do what is necessary leaves many options open, helicopters included,' said Mr Paul Mortimer-Lee, global head of market economics at BNP Paribas, referring to the now-famous remarks from Mr Bernanke about the possible need for aggressive monetary stimulus. -- REUTERS