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Federal Reserve Chairman Ben Bernanke said on Friday central bankers around the world were ready to do more to ease severe credit market strains and support faltering economic growth.
"The continuing volatility of markets and recent indicators of economic performance confirm that challenges remain," he said in remarks prepared for delivery to a European Central Bank conference in Frankfurt. A text of his remarks was made available in Washington.
"For this reason, policymakers will remain in close contact, monitor developments closely, and stand ready to take additional steps should conditions warrant," he said.
Bernanke said steps that central banks have taken to ease liquidity strains and ensure short-term dollar funding around the world have led to improvements in credit market functioning, although he described those gains as "tentative."
"Financial markets remain under severe strain," he said.
U.S. retail sales fell a record 2.8% in October, the government reported on Friday, in the latest sign of the heavy toll the credit crunch is taking on U.S. economic activity.
Markets boosted expectations the Fed would cut benchmark U.S. interest rates by a half-percentage point to 0.5% at its next policy meeting next month after the report.
The 15-nation euro zone economy shrank 0.2% for the second quarter in a row, official data showed, signaling the bloc has fallen into its first recession since its creation in 1999.
The Fed has cut rates 4.25%age points since September 2007 to 1% to counter the credit crisis and support the faltering economy. In addition, the U.S. central bank has launched numerous lending and currency swap facilities to ensure ready access to funds by financial institutions.
On October 8, central banks cut rates globally in their first broadly coordinated policy action in history, as fears of a deep recession pushed aside worries over inflation.
The central banks of the United States, the euro zone, Britain, Switzerland, Canada and Sweden all lowered official rates by a half-percentage point.
Bernanke said on Friday the joint action had been motivated by an easing of inflationary pressures and increased indications of economic slowing in each country.
"The coordinated rate cut was intended to send a strong signal to the public and to markets of our resolve to act together to address global economic challenges."
Bernanke said financial turmoil began with the collapse of U.S. housing markets and losses from delinquent mortgages and mortgage-related assets. More broadly, the crisis has been provoked by the bursting of a global credit bubble as investors underpriced risk, financial institutions took on too much debt, and complex instruments collapsed under stress, he said.
Investors then withdrew from credit markets, and financial institutions became unwilling to take on debt, shrinking the credit available to households and businesses, Bernanke said.
"This credit squeeze is … a principal cause of the economic slowdown taking place in many countries," he said.
Leaders of 20 major industrial and developing economies including the United States and the European Union meet in Washington Friday and Saturday to discuss how to stabilize financial markets.
