Bernanke says financial strains dimming outlook

WASHINGTON (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 said in remarks prepared for delivery to the Charlotte Chamber of Commerce. "We at the Fed will have to remain exceptionally alert and flexible."

A copy of his remarks was made available in Washington.

The Fed's policy-setting Federal Open Market Committee will weigh fresh information about hiring, spending and financial markets when it next meets to consider interest rates on December 11, Bernanke said. The Fed lowered benchmark rates by a cumulative three-quarters of a percentage point to 4.5 percent in September and October to buffer the economy from a prolonged housing slump and credit market turbulence.

"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."

Bernanke's comments echoed those made on Wednesday by Fed Vice Chairman Donald Kohn, who said he had been caught off guard by how poorly financial markets have fared since the central bank last met on October 30-31.

Bernanke said economic data since that meeting had been mixed, with continued weakness in home sales and construction alongside a solid labor market in October. Weekly data on unemployment insurance claims had drifted higher, but was consistent with a moderate expansion in employment, he said.

Meanwhile, household spending has been soft, Bernanke said.

"I expect household income and spending to continue to grow, but the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead," he said.

Bernanke said that core inflation, which strips out volatile foods and energy costs, had been moderate, but he took note of the rising price of oil and said rising costs for food and some imported goods could also put upward pressure in inflation.

"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."

(Reporting by Mark Felsenthal; editing by Leslie Adler)