Bernanke's statement comes as leading investment banks warned that the US was heading for a recession.

 

In a briefing note on Wednesday, economists at Goldman Sachs warned that the world's biggest economy appears to be "falling into a recession".

 

Although the Federal Reserve did not foresee a recession, it predicted slower growth caused by a deep housing slump and credit market strains.

  

"The demand for housing seems to have weakened further, in part reflecting the ongoing problems in mortgage markets"

Ben Bernanke, US Federal Reserve chairman

Bernanke said the Federal Reserve will "remain exceptionally alert and flexible" because conditions could change quickly, adding that it was "prepared to act in a decisive and timely manner" to counter any threat to economic or financial stability.

 

In December the central bank cut interest rates to 4.25 per cent, the lowest in recent years.
 

'Fear of 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," Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Maryland, said.

 

Bernanke said the housing downturn had shaken the "fragile" financial markets and caused big banks to be wary about lending, but insisted that the banking system "remains sound".

He argued that the new system of credit auctions had helped boost liquidity in the financial market, easing a widespread credit crunch.

 

He added that recent economic news have revealed a more pronounced downside risks to growth.

 

"The demand for housing seems to have weakened further, in part reflecting the ongoing problems in mortgage markets."

 

Lower interests 

 

He also cautioned that several factors, including higher oil prices, lower equity prices and softening home values were likely to weigh on consumer spending in 2008.

 

Economists read his remarks as an indication of the central bank's plan to further slash interest rates at a two-day policy meeting later this month.

 

Marc Chandler, an analyst at Brown Brothers Harriman, said Bernanke's comments indicated that the central bank "had done nothing to dissuade the market from an expected 50-basis-point rate cut later this month".

 

Analysts also say that an aggressive rate cut by the Federal Reserve this month will wipe out the dollar's yield advantage against the euro.

 

"Pressure on the dollar is going to be insurmountable," Mike Moran, senior currency strategist at Standard Chartered Bank in New York, said.