Bernanke signals bold Fed action to lift growth

By Glenn Somerville

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke on Thursday acknowledged the economy faces increased risks and indicated the U.S. central bank is ready to cut interest rates aggressively to support growth.

Bernanke cited several factors, including higher oil prices, lower stock prices and falling home values, that he said were bound to hurt consumer spending this year.

"In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary," Bernanke told an event sponsored by two finance groups.

"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," he said.

Analysts welcomed Bernanke's forthright acknowledgment of the dangers faced by the U.S. economy, which some fear may have already slipped into recession.

"I think he's come to terms with the fact that while inflation may be a concern down the road, he has to take care of the train that's coming at him right now, which is the fear of a recession," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore, Maryland.

Bernanke cautioned that conditions can change quickly.

That meant the Fed "must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability."

U.S. stock markets initially surged after Bernanke's comments, then retreated before closing higher on a report that Bank of America was in talks to buy mortgage lender Countrywide Financial Corp..

The Dow Jones Industrial Average added 117.78 points to end at 12,853.09, while the Nasdaq Composite Index closed up 13.97 at 2,488.52.

Bond prices closed mostly lower as investors shifted money to stocks, giving up earlier gains that were fueled by hopes the Fed would lower benchmark overnight rates by a hefty half-percentage point to 3.75 percent at its next scheduled policy meeting on January 29-3O.

Interest-rate futures contracts shifted to price in a near certainty of a half-point cut. The Fed already has cut rates a full percentage point since mid-September.

FOCUS ON GROWTH

Bernanke suggested policy-makers now were more worried about sustaining growth than they were fearful of inflation. He said inflation expectations were "reasonably well anchored" and pledged to monitor those expectations closely.

"Incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced," he said. He cited "considerable evidence that banks have become more restrictive in their lending" to consumers and businesses.