Ben Bernanke, the Federal Reserve Chairman, signalled yesterday that the US central bank was ready to cut interest rates if necessary to counter the risk of an economic slump stemming from this summer’s turmoil in global financial markets.

The Fed Chairman noted that the problems in the sub-prime mortgage market in the United States since the start of the year had spilt over into a general credit crunch. He said that a further tightening of credit conditions could “increase the risk that the current weakness in housing could be deeper with possible adverse effects on consumer spending and the economy more generally”.

The chairman’s remarks to the central bank’s annual economic symposium at Jackson Hole in Wyoming, suggested that the Fed has not yet decided definitively to cut interest rates at the next meeting of its policymaking committee on September 18.

But, given firm expectations in financial markets for a rate cut at that meeting, if not before, it was significant that Mr Bernanke made no attempt to change market perceptions of the Fed’s intentions. Instead, he seemed eager to reassure investors that the Fed understood the potential damage from the credit squeeze. He said that the central bank stands ready to promote the orderly functioning of markets and will act as needed to limit the damage to the broader economy.

The Fed Chairman is treading an even more perilous tightrope than usual for a central banker. He and his colleagues are not anxious to repeat what some see as the mistakes of the Alan Greenspan era, when the bank seemed too quick to cut interest rates every time that there was a financial squall, an approach that some believe only created larger problems down the road.

Mr Bernanke nodded in this direction yesterday when he said that it was “not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions”.

Yet he is also anxious to distinguish between bailing out individual financial institutions and preventing credit problems from threatening either the stability of the financial system or the prospects for continued economic growth.

So far in the present crisis, the Fed has cut only its largely symbolic discount rate to improve liquidity in beleaguered financial markets. But the odds are still good that it will soon cut the Fed Funds rate, the measure that more directly affects economic activity.

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