Bernanke says financial strains dimming outlook

By Hart Matthews

CHARLOTTE, North Carolina (Reuters) - Federal Reserve Chairman Ben Bernanke said on Thursday a resurgence in financial strains in recent weeks had dimmed the outlook for the U.S. economy, signaling an openness to lowering interest rates again.

"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 told the Charlotte Chamber of Commerce. "We at the Fed will have to remain exceptionally alert and flexible."

Bernanke's comments left intact market expectations for a rate cut at the U.S. central bank's next meeting on December 11 and gave a lift to stocks in Asian markets. His comments largely echoed those made on Wednesday by Fed Vice Chairman Donald Kohn.

"Anyone -- ourselves included -- thinking Bernanke might try to steer the market away from confident expectations of a December 11 rate cut has just been disabused of the notion. A rate cut now seems all but inevitable," market research group 4CAST said in a note to clients.

The Fed has already lowered benchmark overnight interest rates by three-quarters of a percentage point since-mid September to buffer the economy from a prolonged housing slump and credit market turbulence. Futures markets are fully pricing in another quarter-point reduction in December and see about a 30 percent chance of a more aggressive half-point move.

Bernanke said the policy-setting Federal Open Market Committee will weigh fresh information about hiring, spending and financial markets when it meets.

"In making its policy decision, the committee will have to judge whether the outlook for the economy or the balance of risks has shifted materially," he said. "In doing so, we will take full account of the implications for the outlook of both the incoming economic data and the ongoing developments in the financial markets."

LINGERING INFLATION CONCERNS

The Fed's Kohn on Wednesday said he had been caught off guard by how poorly financial markets have fared since the policy-makers last met on October 30-31. Stock prices tumbled in early November and credit has become scarce as major financial institutions have reported billions of dollars in write-downs of assets soured by risky mortgages and other debt.

Bernanke on Thursday made clear the central bank still has lingering concerns on inflation.

While core inflation, which strips out volatile foods and energy costs, has been moderate, rising costs for oil, food and some imported goods could prove troublesome, Bernanke said.

"The effectiveness of monetary policy depends critically on maintaining the public's confidence that inflation will be well controlled," he said. "We are accordingly monitoring inflation developments closely."

ECONOMIC DATA 'MIXED'

While Kohn's comments were seen as hinting at a December rate cut, other recent Fed speakers have suggested they continue to view the current setting of policy as appropriate.

In a separate speech on Thursday, Fed Governor Frederic Mishkin said a diversity of views existed among policy-makers about the outlook for growth and suggested he was keeping an open mind on whether the Fed should lower borrowing costs.