US RATE FUTURES-Push up rate cut ideas on Bernanke, homes

(Adds detail, analyst comments, byline)

By Ros Krasny

CHICAGO, Sept 24 (Reuters) - A bleak assessment of the U.S. economic outlook from Federal Reserve Chairman Ben Bernanke on Wednesday helped drive up ideas that the Fed will lower benchmark U.S. interest rates again by year-end.

Short-term interest rate futures, which reflect the market's views on likely Fed policy monetary, showed as much as an 86-percent implied chance of a rate cut in October and a 98-percent chance for a cut by December as Bernanke testified to a congressional Joint Economic Committee.

Adding to the rate-cut fervor was another negative report on the housing market, showing that U.S. existing home sales in August fell by another 2.2 percent, with sales dominated by foreclosures.

The Federal Open Market Committee cut its benchmark federal funds lending rate to 2 percent from 5.25 percent in a series of moves starting in September 2007. The rate has been steady since April, and dealers see little chance for a swing toward higher rates until the second half of 2009.

In prepared testimony to the committee, and later during questioning by lawmakers, Bernanke attempted to connect the dots between a crippled financial system and a hobbling of the broader economy.

"When worried lenders tighten credit, then spending, production and job creation slow," he said. If financial markets seize up, the decline in the housing market will be longer and deeper than now anticipated, Bernanke added.

"Bernanke's economic outlook is grimmer than we have previously seen," said Rudy Narvas, analyst at 4CAST Ltd in New York.

However, "the testimony as a whole suggests that the Fed is looking for other avenues rather than rate cuts to get the economy through the crisis," Narvas said.

Dealers largely brushed aside a comment that if the government's proposed $700 billion bank bailout package boosted the economy, the Fed may have to respond sooner than otherwise in raising interest rates.

As Bernanke spoke, the National Association of Realtors' existing home sales report for August suggested that the drawn-out housing downturn is still in full swing.

The national median price for existing homes fell to $203,100, a record 9.5 percent year-on-year decline and down another 3.4 percent from July.

NAP estimated that as much as 40 percent of sales were of distressed properties, which typically reflects those in or close to foreclosure.

"Underlying private activity is weaker than the headlines and there is little sign of imminent improvement," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York. (Editing by James Dalgleish)