Fed ready to act on worsening outlook: Bernanke

Speaking on Thursday, Bernanke said: "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks."

The chances of the credit crunch impacting the real economy had increased with the publication of recent data, Bernanke said. "Incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced," he said. "Notably, the demand for housing seems to have weakened further, in part reflecting the ongoing problems in mortgage markets."

The financial system "remained fragile" in spite of recent improvements. "Adverse economic or financial news has the potential to increase financial strains and to lead to further constraints on the supply of credit to households and businesses," he said. "I expect that financial-market participants - and, of course, the Committee - will be paying particular attention to developments in the housing market, in part because of the potential for spill-overs from housing to other sectors of the economy."

The performance of the labour market was also a threat to growth: "Last week's report on labour-market conditions in December was disappointing, as it showed an increase of 0.3 percentage point in the unemployment rate and a decline in private payroll employment."

"Heretofore, the labour market has been a source of stability in the macroeconomic situation, with relatively steady gains in wage and salary income providing households the wherewithal to support moderate growth in real consumption spending," he added.

Bernanke noted the increases in energy and food prices, but said: "Thus far, inflation expectations appear to have remained reasonably well anchored, and pressures on resource utilisation have diminished a bit."

To read the speech, click here