Federal Reserve Chairman Ben Bernanke on Thursday hinted that another interest rate cut may be needed to bolster the 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 he expects consumer spending will continue to grow and suggested the country 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, 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. The housing slump has deepened, consumer confidence has plummeted and consumer spending "has been on the soft side," Bernanke said in a speech Thursday night to business people in Charlotte, N.C.
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 2008 due to 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 policymakers must remain "nimble" and he spoke of the need for "flexible and pragmatic policymaking."
Some analysts believed 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" at the Dec. 11 meeting, said Richard Yamarone, economist at Argus Research. "When you have the top two people at the Fed reading from the same script, that is in itself a signal."
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.
In his remarks, Bernanke said rising gasoline and heating oil prices as well as higher food costs have the potential to raise inflation. He said that is something the Fed also is watching.
At the October meeting, the Fed said the risk of higher inflation was roughly in balance with the risk of slower economic growth. Bernanke said Thursday that Fed policymakers "will have to judge whether the outlook for the economy or the balance of risks has shifted materially."
Analysts said the Fed's next move on interest rates probably will be cinched by the outcome of next week's employment report. If the report shows a weaker employment climate, that could seal a rate cut, economists said. A sturdy labor market that has meant income gains and jobs has served as a shock absorber for consumers. Those positive forces have helped to offset the negative ones from weaker home value and harder-to-obtain credit.
The November employment report, released by the government next week, is expected to show the unemployment rate climbing to 4.8 percent, from 4.7 percent, as new job-creation slows.
Bernanke is facing his biggest challenge since taking over at the Fed in February 2006. Some analysts have questioned whether he waited too long to cut key interest rates and whether he has acted aggressively enough in reacting to the nation's economic problems.
This program aired on November 30, 2007. The audio for this program is not available.