"Developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy," he said.
The Fed meets again Oct. 30-31 and markets see a 32 percent chance that policy-makers will cut benchmark overnight borrowing costs by a quarter-percentage point then, as implied by short-term federal funds futures.
Economic information published since the September Fed meeting points to the housing slump exerting a "significant" drag through early 2008, Bernanke said. The Fed is closely monitoring whether tighter credit has affected business or household spending, he added.
Bernanke further said the Fed would keep close watch on employment and labor income, since any income gains would support consumer spending even if home values stagnate or fall. "The labor market has shown some signs of cooling, but these are quite tentative so far, and real income is still growing at a solid pace," he said.
From a regulatory standpoint on the credit crisis, Bernanke said that investment vehicles needed to be as transparent as possible.
He also said that it was difficult for the central bank to identify asset bubbles early enough to deal with them with "blunt" policy tools. Product and technological innovations can sometimes lead to excesses, he said.
"One of the downsides of innovation is that you make mistakes. If you want progress, you have to let the system work. If you want to be tougher and try to restrain excesses, you may sacrifice something in exchange."