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Federal Reserve Chairman Ben Bernanke warned
Tuesday that the financial crisis has not only darkened the
country's current economic performance but also could prolong the
pain.


      The Fed chief's more gloomy assessment appeared to open the door
wider to an interest rate cut on or before Oct. 28-29, the central
bank's next meeting, to brace the wobbly economy.


      Bernanke said the Fed will "need to consider" whether its
current stance of holding rates steady "remains appropriate"
given the fallout from the worst financial crisis in decades.


      If the Fed does lower its key rate from 2 percent it would mark
an about-face. The Fed in June had halted an aggressive
rate-cutting campaign to revive the economy out of fear those low
rates would aggravate inflation. Since then, financial and economic
conditions have deteriorated, while inflation pressures have
calmed, giving the Fed more leeway to again cut rates.


      Many believe the country is on the brink of, or already in, its
first recession since 2001.


      "The outlook for economic growth has worsened," Bernanke said
in prepared remarks to the annual meeting here of the National
Association for Business Economics.


      All told, economic activity is likely to be "subdued" during
the remainder of this year and into next year, Bernanke said. "The
heightened financial turmoil that we have experienced of late may
well lengthen the period of weak economic performance and further
increase the risks to growth," he warned.


      Consumers - major shapers of economic activity - have buckled
under the weight of rising joblessness, shrinking paychecks,
hard-to-get credit, declining net wealth and tanking home and stock
values. All the strains are "now showing through more clearly to
consumer spending," Bernanke said.


      Meanwhile, worsening sales prospects and a heightened sense of
uncertainty have begun to weigh more heavily on businesses, making
them more cautious to hire and to invest in their companies, he
said.


      Employers cut jobs in September at the fastest pace in more than
five years, the government reported last week. Payrolls were
slashed by 159,000 last month alone. It was the ninth straight
month of job losses. A staggering 760,000 jobs have disappeared so
far this year.


      The financial and credit crises, which took a turn for the worst
in September and continue to stubbornly persist, are likely to
"increase the restraint on economic activity in the period
ahead," Bernanke said.


      Even households with good credit histories are now facing
difficulties obtaining mortgages or home equity lines of credit, he
noted. Banks are also reducing credit card limits and denial rates
on auto loan applications are rising, he said.


      Banks, too, are feeling the strain of a lockup in lending,
particularly in the market for commercial paper.


      To that end, the Fed on Tuesday announced a radical plan to buy
massive amounts of this short-term debt in an effort to break
through a credit clog that is imperiling the economy.


      "The expansion of Federal Reserve lending is helping financial
firms cope with reduced access to their usual sources of funding,"
Bernanke explained.


      Invoking Depression-era emergency powers, the Fed will begin
buying commercial paper - short-term funding that many companies
rely on to pay their workers and buy supplies.


      Bernanke believed the Fed's bold actions - along with the $700
billion financial bailout signed into law by President Bush on
Friday - will help restore confidence in financial markets and help
them function more normally.


      He also defended the timing of the actions by the Fed and the
Bush administration. "We have learned from historical experience
with severe financial crises that if government intervention comes
only at a point at which many or most financial institutions are
insolvent or nearly so, the costs of restoring the system are
greatly increased. This is not the situation we face today," he
said.
      

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Business and Economic News

Federal Reserve Chairman Ben Bernanke warned
Tuesday that the financial crisis has not only darkened the
country's current economic performance but also could prolong the
pain.


Bernanke: More economic pain ahead

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