BEN BERNANKE'S SPEECH

JACKSON HOLE, Wyo. -- The Federal Reserve must take the effects of recent financial market disruptions into account in setting monetary policy and is ready to act as needed to ease their impact on the economy, Fed Chairman Ben Bernanke said Friday.
Mr. Bernanke's prepared remarks to the Kansas City Fed's annual Jackson Hole seminar suggest the central bank is set to lower rates unless short-term credit market conditions improve.

"Developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy," Mr. Bernanke said, The Fed "stands ready to take additional actions" to boost liquidity, "will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets."

Mr. Bernanke went further Friday, saying "the further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected, with possible adverse effects on consumer spending and the economy more generally." In fact, "global financial losses (triggered largely by subprime mortgage concerns) have far exceeded even the most pessimistic projections of credit losses on those loans," Mr. Bernanke said.

To be sure, Mr. Bernanke's words weren't entirely soothing to investors. "It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions," Mr. Bernanke said.
Still, there was little in Mr. Bernanke's speech that would cause investors to pull back from expectations for reductions in the Fed's primary tool, the federal-funds target rate, which has stood at 5.25% for more than one year. Futures markets are pricing in multiple fed-funds rate cuts by the end of the year.

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