US Federal Reserve chairman Ben Bernanke told Congress today that weak US economic growth may prompt the central bank to cut short-term interest rates further if needed.
Bernanke cited 'downside risks' to economic growth, but he said the central bank is prepared to take action if growth is threatened, despite heightened concerns about inflation.
'It is important to recognise that downside risks to growth remain,' he said in remarks prepared for his semiannual economic report to Congress.
'The FOMC (Federal Open Market Committee) will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,' he added.
Bernanke said mounting price pressures appear to be buffeting the world's largest economy and American consumers and that recent economic surveys suggest inflationary pressures could be mounting.
'The further increases in the prices of energy and other commodities in recent weeks, together with the latest data on consumer prices, suggest slightly greater upside risks to the projections of both overall and core inflation than we saw last month,' the Fed chairman said.
He spoke as world oil futures hovered around record peaks at $100 a barrel even as US economic growth was sputtering.
Bernanke said that if inflationary risks increase it could complicate the central bank's ability to continue cutting borrowing costs to help underpin economic growth.
The Fed chairman said a lingering housing market slump and a related credit squeeze sweeping the financial markets were continuing to pressure the US economy, resulting in a 'distinctly less favourable' economic situation.
In a bleak appraisal, Bernanke told Congress that economic growth had 'slowed sharply' during the fourth quarter of 2007 and said the country's job market had 'similarly softened.' US gross domestic product growth moderated abruptly to a 0.6%annualised crawl in the last three months of 2007.
The Fed has aggressively slashed interest rates by 225 basis points since September in a bid to shore up growth, reducing its key short-term federal funds interest rate to 3%.
Many economists expect the Fed to cut rates again at a March 18 policy meeting. But Bernanke signaled that inflation worries were weighing on the Fed.
'Any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and could reduce the flexibility of the FOMC to counter shortfalls in growth in the future,' Bernanke said.
While signalling that inflation risks could possibly hamper the central bank's rate-cutting campaign, Bernanke said it was also possible that slower economic growth could temper price increases.
