Federal Reserve Chairman Ben Bernanke on Tuesday raised the possibility of a cut in the Fed's benchmark interest rates to help spur an increasingly unstable economy.
In a lunchtime speech to the National Association for Business Economics in Washington, Bernanke, striking a tone similar to that used in the minutes of Fed Board of Governors' meetings, said, "Overall, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased. At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate."
The benchmark federal funds rate remains at 2%; the discount rate is 2.25%. Fed funds futures on Tuesday were pointing toward an increasing probability of a cut in the funds rate of 50 basis points to 1.5%.
Bernanke's comments were apparently not effusive enough for investors, who sent stocks down sharply during and after his address. The Dow, which had been fluttering between small gains and losses throughout the morning, sank shortly after noon and continued its decline through Bernake's speech to a loss of nearly 300 points by 2:15 p.m.
The Fed chief noted the continuing slump in the housing market, which he said "continues to be a primary source of weakness in the real economy as well as in the financial markets." But, he added, "The slowdown in economic activity has spread outside the housing sector."
He also acknowledged a pullback among consumers."Sluggishness of real incomes, together with tighter credit and declining household wealth, is now showing through more clearly to consumer spending. Indeed, since May, real consumer outlays have contracted significantly."
"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. "