Bernanke Leaves Door Open to Another Rate Cut

(AP Photo/Luis M. Alvarez)

WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke pledged Friday to work closely with other central banks to fix global financial problems and left open the door to a fresh interest rate cut to help brace the sinking U.S. economy.

"The continuing volatility of markets and recent indicators of economic performance confirm that challenges remain," Bernanke said in remarks prepared for a central banking conference in Frankfurt, Germany. "For this reason, policymakers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant."

The Fed chief's remarks appeared to reinforce the view of Wall Street investors and economists that the Fed probably will lower interest rates again on Dec. 16, its last regularly scheduled meeting this year. The Fed's key rate is now at 1 percent.

Although the Fed has ratcheted down rates and taken a flurry of unprecedented actions to arrest the worst financial since the Great Depression, deep problems remain. Credit is still not flowing normally in the U.S. and overseas, hobbling not only the domestic economy but also the global economy, which many believe is edging toward recession.

Bernanke's remarks come as President George W. Bush and other world leaders descend on Washington for an extraordinary summit to explore options for economic relief and develop plans to prevent a repeat of the type of housing, credit and financial crises now endangering the world economy.

American consumers are reeling under all the economy's problems, a government report out Friday showed. Rising unemployment, shrinking nest eggs and falling home values have made consumers less inclined to spend.

The Commerce Department reported that retail sales dropped by 2.8 percent in October, the largest amount on record. That broke the old record - a 2.65 percent decline - in November 2001, following the terrorist attacks.

The retail sales report was just the latest piece of news showing the economy got off to a dismal start in the final quarter of this year.

The nation's unemployment rate zoomed to 6.5 percent in October, a 14-year high, the government reported last week.

All that is reinforcing analysts' predictions that the economy is continuing to shrink in the current October-December quarter. The economy contracted in the third quarter as consumers sharply cut back on their spending. If economic activity in the fourth quarter declines, it would satisfy one classic definition of a recession. That is, two straight quarters of shrinking economic activity.

The epic proportions of the current financial crisis along with the global economic slowdown have been an occasion for unprecedented international policy coordination, Bernanke said.

Most notably, the Fed and other major central banks on Oct. 8 joined together to slash interest rates, the first coordinated action of this type in the Fed's history. "The coordinated rate cut was intended to send a strong signal to the public and to markets of our resolve to act together to address global economic challenges," Bernanke said.

The Fed also has set up new programs to supply billions of dollars to other central banks - in exchange for those countries' currencies - to help ease heavy demand for dollars in many countries.

"The recent sharp deterioration in conditions in funding markets left some participants outside the U.S. without adequate access to short-term dollar financing," Bernanke explained.

In mid-October, the Fed eliminated limits on the sizes of these so-called "swap" arrangements with the European Central Bank, the Bank of England, the Bank of Japan and Switzerland's central bank.

Although these and the central banks' other actions have helped ease some stresses, financial markets remain under "severe strain," Bernanke said.

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