Speaking Monday night to the New York Economic Club, Fed Chairman Ben Bernanke gave little indication on whether the FOMC is inclined to cut rates again at its next policy meeting in two weeks. "Conditions in financial markets have shown improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time, and we may well see some setbacks," Bernanke said, expressing satisfaction at the apparent success of the Fed's strategy. However, he said, "One must also take seriously the possibility that policy actions that have the effect of reducing stress in financial markets may also promote excessive risk-taking and thus increase the probability of future crises." Bernanke said the housing sector will likely deteriorate further, and may become a "significant drag" on the U.S. economy through early 2008, but stopped short of trying to guess to what extent: "It remains too early to assess the extent to which household and business spending will be affected by the weakness in housing and by the tightness in credit conditions." Over the potential that lower interest rates may stoke inflationary concerns, Bernanke repeated an earlier stance, saying the Fed was "prepared to reverse the policy easing if inflation pressures proved stronger than expected." In response to a question about the effect of a falling dollar on inflation, Bernanke said: "One cannot deny that, all else equal, when the dollar depreciates, that there is some inflationary effect that comes through the cost of imports," but added, "Our experience over the recent decade has been that those effects are relatively small." He said the Fed's principle task is to preserve purchasing power with regard to domestic products, for which a flexible exchange rate is the best tool.
Commentary: Greenspan: Credit Crunch Will Take A Toll • Bond Market Starting To Notice Tumbling Dollar, Soaring Commodities?
Stocks to watch: DIA, SPY, AGG
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