Bernanke Says Fed Prepared to Help U.S. Economy

WASHINGTON(Reuters) – Federal Reserve Chairman Ben Bernanke on Wednesday signaledthe U.S. central bank was ready to cut interest rates again to preventa housing slump and shaky credit markets from further damaging a weakeconomy.

Delivering the Fed’s semiannual report on the economy to Congress,Bernanke took note of recent elevated readings on inflation, but madeclear the central bank’s main concern was the economy would fail torevive later this year.

"It is important to recognize that downside risks to growth remain,"Bernanke told the House of Representatives’ Financial ServicesCommittee.

"The (Fed) will be carefully evaluating incoming information bearingon the economic outlook and will act in a timely manner as needed tosupport growth and to provide adequate insurance against downsiderisks," he said.

The central bank has lowered overnight interest rates to 3 percentfrom 5.25 percent in five steps since mid-September. Financial marketssaw Bernanke’s testimony as validating bets on another half-percentagepoint cut at the Fed’s next meeting on March 18.

"I think they are probably doing the right thing in focusing onsluggish growth more than on inflation. They’re willing to inject morejuice into the system, and that’s what they need to do," said FirasAskari, head of currency trading at BMO Capital Markets in Toronto.

The dollar hit a record low against the euro on Bernanke’s remarks, and U.S. government debt prices fell.

Stocks initially stayed mired in negative territory, but reversedcourse as a U.S. regulator gave a green light to housing financecompanies Fannie Mae and Freddie Mac to invest more money in themortgage market.

DELICATE BALANCE

Bernanke said that while the central bank expects inflation tomoderate, risks that price pressures could remain elevated haveclimbed, underscoring the difficult situation policy-makers face.

"The further increases in the prices of energy and other commoditiesin recent weeks, together with the latest data on consumer prices,suggest slightly greater upside risks to the projections of bothoverall and core inflation than we saw last month," he said. Agovernment report last week showed consumer prices rose asteeper-than-expected 0.4 percent in January.

The Fed typically lowers interest rates to boost growth but raisesborrowing costs if it wants to cool inflation pressures.Higher-than-desirable inflation could limit the central bank’s optionsas it seeks to put a floor under the slowing economy.

If the public began to doubt the Fed’s willingness to take measuresto keep inflation at bay, it could hurt the central bank’s ability tosupport growth, Bernanke added.

"Any tendency of inflation expectations to become unmoored or forthe Fed’s inflation-fighting credibility to be eroded could greatlycomplicate the task of sustaining price stability and could reduce theflexibility of the (Fed) to counter shortfalls of growth in thefuture," Bernanke added.

A week ago, the central bank lowered its forecast for 2008 economicgrowth by a half-point to between 1.3 percent and 2 percent, whileraising its projection for unemployment and inflation.

"The risks to this outlook remain to the downside," Bernanke said.

POLICY LAGS

He noted that monetary policy affects the economy with a lag andsaid the Fed needed to keep in mind the economy’s likely path, as wellas the risks it faces.

"A critical task for the Federal Reserve over the course of thisyear will be to assess whether the stance of monetary policy isproperly calibrated to foster our mandated objectives of maximumemployment and price stability in an environment of downside risks togrowth, stressed financial conditions, and inflation pressures," hesaid.

The struggling housing market should weigh on growth in comingquarters, he said. Higher energy prices, lower home and stock marketvalues, and slowing job creation are likely to damp household spending,Bernanke added.

Households feeling the pinch of sliding home and stock values, andhigher energy prices may hold back on the spending that providestwo-thirds of the economy’s thrust, Bernanke said. Slower hiring isalso likely to weigh on consumers, he added.

Bernanke said financial markets remained strained in the wake ofrising mortgage delinquencies and worries about credit quality.However, steps taken by the Fed and other central banks to ease creditmarket conditions appear to have helped.

(Additional reporting by Alister Bull; Editing by Neil Stempleman)