Fed Chief Offers Hint of Rate Cut

Reports Show Consumer Spending, Personal Income Inch Up

U.S. stock markets jumped sharply on Friday morning, as investors bet that recent remarks by Federal Reserve Chairman Ben S. Bernanke indicate interest rates will be cut again when the Fed meets in two weeks.

The Dow Jones industrial average added 130 points in the first twenty minutes of trading, a gain of around one percent. The Nasdaq and S&P 500 had similar percentage gains.

Optimism that rates are headed lower offset tepid report on consumer spending and a drop in construction. The Commerce Department said Friday that consumer spending increased 0.2 percent in October compared to the month before, the slowest rate of increase since the summer. Construction spending, meanwhile, fell 0.8 percent as a national housing slump continued.

But the same report showed that inflation also remained under control, adding to the sense that the Fed is likely to cut rates at its December session out of concern that the risks of a stalling economy outweigh those of rising prices.

Bernanke said last night that the central bank would take into account recent deterioration in the financial markets as it decides whether to reduce rates. Hours earlier, the White House released its economic forecast that acknowledged housing would be a drain on the economy next year, but it said tightening credit conditions would not stall business expansion.

The separate developments show how the Fed and the administration are grappling with a deterioration in the housing and credit markets as they set a course for the nation's economic policy. This month, new strains on global markets for debt have emerged, leading many economists to think there is greater risk of a recession.

Bernankelaid out in a speech to the Charlotte Chamber of Commerce how he is thinking through the economic situation as the central bank's policymaking committee prepares to meet Dec. 11. He noted that, by many measures, the labor market is doing well, with job growth and wages both on the rise.

But he said household spending appears to be softening, and that "the combination of higher gas prices, the weak housing market, tighter credit conditions and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead."

Bernanke said that the central bank was monitoring inflation closely, but he notably did not repeat language describing the risks of inflation and slower growth as "roughly balanced." Rather, he indicated that worsening conditions in the markets for many kinds of debt could slow the economy.

"These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors," Bernanke said.

Along with comments by Fed Vice Chairman Donald Kohn on Wednesday, Bernanke's speech signaled that the central bank was more inclined to cut a key short-term interest rate at its Dec. 11 meeting than it had indicated since its last meeting, Oct. 31. Credit markets appeared to be on the mend then, before tightening again in November.

The Bush administration, meanwhile, acknowledged yesterday that the housing downturn would slow growth next year, but was more optimistic than the Fed and many private forecasters.