AUSTIN, Texas (Reuters) - Federal Reserve Chairman Ben Bernanke warned on Monday that the U.S. economy remained under considerable strain and said policy-makers must be ready to take decisive action to protect jobs and growth.
"Our nation's economic policy must vigorously address the substantial risks to financial stability and economic growth that we face," Bernanke told the Greater Austin Chamber of Commerce.
Bernanke said that further interest rate cuts beneath the Fed's current target of 1 percent for its benchmark overnight funds rate were "certainly feasible", but suggested the Fed would also use other unconventional measures to aid growth.
"Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve's quiver -- the provision of liquidity -- remains effective," he said.
Bernanke said the Fed could directly purchase longer-term U.S. Treasury or agency securities in order to influence yields and stimulate demand.
"Second, the Federal Reserve can backstop liquidity not only to financial institutions but also directly to financial markets, as we have recently done for the commercial paper market," he said.
The Fed is widely expected to lower rates by a half percentage point to 0.50 percent at its next scheduled meeting, on December 15-16, and to use so-called quantitative measures to pump up financial market liquidity and limit economic weakness.
"The likely duration of the financial turmoil is difficult to judge, and thus the uncertainty surrounding the economic outlook is unusually large. But even if the functioning of financial markets continues to improve, economic conditions will probably remain weak for a time," he said.
(Reporting by Ros Krasny; Writing by Alister Bull; Editing by James Dalgleish)
