Bernanke: Economic weakness to continue

Fed chief says economic outlook remains weak, and the Fed will continue to use its tools to fight the crisis - but rate cuts may not be coming.

NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke said on Monday that the nation's economic weakness will continue for some time, even if the government's efforts to boost lending help restore the credit markets to normal.

"The likely duration of the financial turmoil is difficult to judge, and thus the uncertainty surrounding the economic outlook is unusually large," said Bernanke.

Bernanke, addressing business leaders in Austin, Texas, said the Fed will continue to use the tools it has been given to fight the financial crisis. He hinted at further aggressive actions like the ones taken recently to prop up the short-term commercial paper market or buy $600 billion in securities and debt held by Fannie Mae and Freddie Mac.

In fact, Bernanke said that cutting rates may not be the Fed's most effective method for tackling the financial crisis.

"Although conventional interest rate policy is constrained ... the second arrow in the Federal Reserve's quiver -- the provision of liquidity -- remains effective," he said.

The Fed cut its key funds rate to an all-time low of 1% in October in response to deterioration in the global financial system, and many economists expect the Fed to cut interest rates again when it meets Dec. 15-16.

Rate cuts tend to drive up inflation, but falling prices have given the Federal Reserve more wiggle room to lower interest rates. Core inflation is now at its lowest point since October 2007, according to a recent Department of Labor report.

Bernanke said that while further reductions in the Fed's benchmark rate are "certainly feasible," the central bank doesn't have much left to trim.

Instead of cutting rates, the Fed could take further steps to unfreeze credit markets, Bernanke said.

Since last December, the Fed has lent out trillions of dollars to banks, businesses, mutual funds and foreign central banks in an effort to boost liquidity in the financial markets and keep the economy from collapsing.

In addition, Bernanke said the Fed could help achieve financial stability by continuing to buy up asset-backed securities and by backstopping liquidity in financial markets.

"Such programs are promising because they sidestep banks and primary dealers to provide liquidity directly to borrowers or investors in key credit markets," Bernanke said.  

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