Federal Reserve Chairman Ben Bernanke this afternoon said the US central bank will act as needed to ensure beleaguered housing and credit markets do not further undermine an already sluggish economy.
And he suggested it would be "worthwhile" considering letting the federal government buy distressed mortgages if the worst housing slump in a quarter century deepens.
Federal Reserve Chairman Ben Bernanke
"I think that it is worthwhile to be thinking about possible approaches one might take if the housing situation were to get much worse," Mr Bernanke told the House Financial Services Committee in Washington.
The Fed chairman acknowledged regulators made "mistakes" in mortgage-market oversight and said he is working "very hard" to address the subprime-mortgage crisis.
He supported addressing the housing slump through private-sector efforts, reforming the Federal Housing Administration to refinance troubled mortgages and improving oversight of Fannie Mae and Freddie Mac, the government-backed companies that are the biggest buyers of US mortgages.
He also hinted at further interest rate cuts. The Fed has lowered benchmark overnight interest rates to 3 per cent from 5.25 per cent since mid-September and financial markets expect policy-makers to lower them by a further half-percentage point at their next meeting on March 18th.
"The [Fed] 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 said.
However, he tempered his commetns by saying the Fed had to keep a close watch on prices.
He said that while the central bank expects inflation to moderate as high energy and commodity costs recede, there was a risk price pressures could remain elevated.
Increasing interest rates is the ususal inflation-controlling response and Mr Bernanke warned that if the public doubted the Fed's willingness to take measures, it could hurt the central bank's ability to support growth.
"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," he said.
"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 (Fed) to counter shortfalls of growth in the future," Mr Bernanke added.