Bernanke hints at need for rate cut

Federal Reserve Chairman Ben S. Bernanke hinted Thursday 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 “head winds for the consumer in the months ahead,” he said.

Bernanke said he expected consumer spending would continue to grow and suggested the country could withstand current problems without falling into a recession. But he indicated that consumers could turn more cautious as they try to cope.

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.

Those comments probably will be viewed as a sign that the Fed may lower interest rates when it meets Dec. 11, its last session of the year.

“Bernanke is leaning in the direction of a rate cut,” said Brian Bethune, an 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 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 businesspeople in Charlotte, N.C.

The 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,” he said.

Bernanke spoke hours after the White House lowered its economic growth projection for 2008 because of 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% 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, when analysts expect growth of 1.5% or less.

Just a day before Bernanke’s speech, the Fed’s No. 2 official suggested that the central bank might be inclined to slice rates again because of Wall Street’s turbulence and 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.

Analysts said the Fed’s next move on interest rates probably would 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. The November employment report is expected to show the unemployment rate climbing to 4.8% from 4.7% as job creation slows.