The chairman's speech comes amid growing evidence that the U.S. economy has weakened further in recent weeks because of the downturn in the housing and credit markets.Fed Vice Chairman Donald Kohn indicated as much Wednesday when he said economic uncertainties were "unusually high" and required the Fed to be "flexible" in its policymaking.
Kohn's remarks were widely viewed as a sign that the Fed was willing to cut interest rates again at its Dec. 11 meeting, triggering an explosive rally on Wall Street.
The economic data out Thursday offered further evidence that the economy is likely to get worse before it gets better. But financial markets were largely on hold during the day as investors waited to see what Bernanke would say.
Rate Cuts So Far
So far, the Fed has cut the benchmark federal funds rate by three-quarters of a point, to 4.5%. When the central bank last cut rates on Oct. 31, it indicated further reductions might not be needed because the economy remained relatively strong. But as Kohn acknowledged on Wednesday, the economic data since then has been much worse than expected.
On Thursday alone, there were softer-than-expected new-home sales and a surge in new claims for jobless benefits, heightening fears of a possible recession.
The Commerce Department said new-home sales in October were at an annual rate of 728,000 units -- well below Wall Street economists' forecasts for a 750,000-unit rate -- while the median sales price plummeted at the steepest rate since 1981.
The department revised down September new-home sales steeply to a 716,000-unit rate from a previously reported 770,000, further underlining the housing sector's decline.
Separately, the Labor Department said new claims for unemployment aid jumped by23,000 last week to the highest since February, though the figure might have been affected by the fact that last Thursday was the U.S. Thanksgiving Day holiday.
The Commerce Department revised up its estimate for third-quarter GDP expansionto a 4.9 percent annual rate from 3.9 percent reported a month ago. But the weak housing sector
and waning consumer confidence already is predicted to sap fourth-quarter growth and many analysts say risks are rising for a recession next year.
"Lights Out for Economy"
"It looks like it could be lights out for the economy," said economist Chris Rupkey of Bank of Tokyo-Mitsubishi UFJ in New York, referring to the rise in claims. "This is exactly what it looks like when we are going into recession."
Paul Ashworth, an economist with Capital Economics Inc. in London, said the third-quarter GDP figures were misleadingly optimistic since they largely predated the turmoil that hit financial markets in August.
"It is a completely different world now and we expect GDP to actually contract over the final three months of this year," Ashworth said. "The chances of an outright recession -- two
quarters of negative growth -- are probably as high as 50-50."
The White House acknowledged that economic prospects were suffering, recasting its estimates for 2008 GDP growth downward to 2.7 percent from 3.1 percent that it forecast in June.
Economist Steven Wieting of Citigroup said that after showing surprising resilience through 2-1/2 years of housing declines, the economy now faced pressure from tightening credit
conditions. As a result, "We ... think growth in the fourth quarter will be below 1 percent," he added.