``The Federal Reserve will continue to watch the situation closely and will act as needed to support efficient market functioning and to foster sustainable economic growth and price stability,'' Bernanke said in a speech to the Economic Club of New York today.
Credit markets have improved, he added, while a full recovery will take time ``and we may well see some setbacks.''
Bernanke's speech, his first on the economy since August, comes as investors pared expectations for an interest-rate cut this month. Retail sales increased in September and jobs and wages picked up, suggesting consumers are weathering the worst housing slump since 1991 and reduced access to credit.
The Fed chief, as Vice Chairman Donald Kohn did two weeks ago, pointed out risks to both growth and inflation, declining to steer investors on whether he favors lower borrowing costs.
``He was not giving away anything about what the Fed was going to do at the next meeting,'' said Robert Hormats, vice chairman of Goldman Sachs International, who attended the dinner.
The dollar and Treasuries were little changed in Asian trading after Bernanke's remarks. The U.S. currency was at $1.4202 per euro at 9:16 a.m. in Tokyo and 10-year Treasury notes yielded 4.68 percent.
The Federal Open Market Committee lowered its benchmark rate by a half point to 4.75 percent on Sept. 18, the first cut in four years, to protect the U.S. from sinking into a recession sparked by fallout from the housing-market collapse.
``The ultimate implications of financial developments for the cost and availability of credit, and thus for the broader economy, remain uncertain,'' Bernanke said today. ``It remains too early to assess the extent to which household and business spending will be affected'' by the housing recession.
Answering questions after his speech, Bernanke said while central banks can't be ``indifferent'' to exchange rates, data show the effect of a falling dollar on prices is ``relatively small.''
Bernanke's speech described the events leading up to the Fed's discount rate cut in August and half-point cut in the benchmark lending rate Sept. 18, and the thinking behind policy makers' actions. The September reduction exceeded most economists' forecasts.
``Risk management considerations also played a role in the decision, given the possibility that the housing correction and tighter credit could presage broader weakening in economic conditions that would be difficult to arrest,'' he said.
In response to a question by Henry Kaufman, the former Salomon Brothers Inc. economist who now runs a New York firm bearing his name, Bernanke said investment firms ``need to be as transparent as possible'' about how they value their assets.
``This current financial stress is not likely to disappear overnight; partly it is an information problem,'' Bernanke said. ``It is going to take a while for investors to appropriately value these assets.''
Kaufman asked Bernanke what market and economic information he would need for more effective policy making.
``I would like to know what those damn things are worth,'' Bernanke joked, referring to the products that investors have shunned in the credit rout. ``This episode has revealed a weakness in structured credit products,'' namely the difficulty in coming up with valuations in periods of stress.
The economy's performance so far this year ``has been reasonably good,'' and evidence ``has been limited'' that the housing recession is hurting household spending, Bernanke said.
At the same time, there are signs that the job market is ``cooling,'' and Fed policy makers will be watching household and business spending along with payroll and income changes, he said.
Bernanke said the risks of a larger cut in rates last month seemed acceptable because inflation figur...