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Bernanke hints rate cut may be needed

US Federal Reserve Chairman Ben Bernanke hinted that another interest rate cut may be needed to bolster the US economy.

The worsening credit crunch, a deepening housing slump and rising energy prices probably will create some "headwinds for the consumer in the months ahead," he said.

Bernanke said on Thursday he expected consumer spending to continue to grow and suggested the US can withstand the current problems without falling into a recession. But he indicated that consumers could turn more cautious as they try to cope with all the stresses.

The odds have grown that the country could enter a recession. A sharp cutback in consumer spending could send the economy into a tailspin. Against this backdrop, Fed policymakers will need to be "exceptionally alert and flexible," Bernanke said.

That comment probably will be viewed as a sign the Fed may lower interest rates when it meets on Dec. 11, its last session of the year.

"Bernanke is leaning in the direction of a rate cut," said Brian Bethune, an economist at Global Insight.

Twice this year the central bank has trimmed rates to keep the housing collapse and credit crunch from throwing the economy into a recession. Those cuts came in September and late October.

In the October meeting, Bernanke and his Fed colleagues signaled that further cuts might not be needed. Since then, however, financial markets have endured more turmoil.

Consumer confidence has plummeted, the housing slump has deepened, and consumer spending "has been on the soft side," Bernanke said in a speech on Thursday night to business people in Charlotte, North Carolina.

A copy of his remarks was made available in Washington.

The economic outlook has been "importantly affected over the past month by renewed turbulence in financial markets, which has partially reversed the improvement that occurred in September and October," Bernanke said. "These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors," he said.

Bernanke spoke hours after the White House lowered its economic growth projection for next year because of the deteriorating housing market. The White House also raised its estimate for unemployment next year, but said inflation should moderate.

The Commerce Department reported that the economy grew at a 4.9 percent rate from July through September, the fastest pace in four years.

The impressive performance, though, was not expected to carry into the final three months of the year, when analysts expect growth of 1.5 percent or less.

Just a day before Bernanke's speech, the Fed's No. 2 official suggested the central bank may be inclined to slice rates again because of Wall Street's turbulence and the worsening problems in housing and in credit markets.

Donald Kohn's remarks sent the market soaring, with the Dow Jones industrial average gaining more than 300 points.

Bernanke echoed some of the same concerns. Kohn had said that policymakers must remain "nimble" and he spoke of the need for "flexible and pragmatic policymaking."

Some analysts said the similarity in tone and language of the Fed's top two officials was deliberate.

It appears they are trying "to send a message to financial markets that a rate cut could be in the offing", said Richard Yamarone, economist at Argus Research.

Bernanke, like Kohn, is keenly interested in how all the economic stresses will affect consumers.

"I expect household income and spending to continue to grow, but the combination of higher gas prices, the weak housing market, tighter credit conditions and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead," Bernanke said in his speech.
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