Fed chief suggests more rate cuts may be needed to boost economy

WASHINGTON -- Federal Reserve Chairman Ben Bernanke Tuesday suggested the central bank may have to cut interest rates to shore up a rapidly deteriorating economy and address a credit crisis of "historic dimensions."

In a speech for delivery to the National Association for Business Economics, Bernanke said that in light of a worsening economic picture, and somewhat better inflation readings "the Federal Reserve will need to consider whether the current stance of monetary policy remains appropriate."

"The Fed chairman just gave the green light for a rate cut at the October meeting, if not before," Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, said in a note to clients.

Bernanke also warned that the economic downturn could last some time, with businesses and consumers unable to get needed credit.

"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."

The central bank has held its target for a key interest rate steady at 2% since the spring. In recent months, Fed officials have been in a bind, caught between slowing growth and rapidly rising inflation. In the past several weeks, however, oil and other commodity prices have fallen dramatically, while unemployment has spiked, consumer spending has slowed, and the credit crisis has spread incessantly despite numerous Fed efforts to soothe the markets, including providing hundreds of billions of dollars of low-interest loans.

Bernanke noted that the economy had shown signs of weakening even before the recent increase in financial market tensions. While he said that falling home prices and sales continued to be the primary problem in both the real economy and financial markets, he noted that "the slowdown in economic activity has spread outside the housing sector."

Rising joblessness and sluggish wages have forced consumer spending, more than two-thirds of economic activity, to "contract significantly" since May, Bernanke said. Business investment spending is under pressure.