Bernanke signals readiness to cut U.S. rates

By Mark Felsenthal

WASHINGTON (Reuters) - U.S. Federal Reserve Chairman Ben Bernanke on Tuesday signalled a readiness to lower U.S. interest rates in a dramatic shift to support an economy battered by a financial crisis of "historic dimension."

Recent economic data and financial developments show the outlook for growth has worsened, Bernanke told the National Association for Business Economics. The outlook for inflation, while still uncertain, has improved somewhat as oil and other commodity prices have eased, he added.

"In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate," Bernanke said.

In opening the door to rate cuts, Bernanke is departing from the view he and other Fed officials had expressed until recently that lower rates would likely have little effect in boosting economic activity while credit markets are frozen.

The Fed cut interbank lending rates to 2.0 percent in seven steps between mid-September of last year and the end of April in a bid to put a floor under the economy. Since then, the central bank has focussed on cash auctions and loans of ultra-safe Treasury securities to unlock credit markets.

The Fed's efforts at restoring credit flows by pumping hundreds of billions of dollars into the financial system have become increasingly frequent and aggressive. Earlier on Tuesday, the Fed announced a plan to buy an unspecified amount of commercial paper to ensure this common channel of short-term corporate lending remains open.

US stocks, already lower on credit worries, initially extended their decline on Bernanke's gloomy growth outlook but then pared losses. Prices for U.S. government debt at first found support, but then slipped as stocks gained.

RATE CUT WEAPON