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Federal Reserve Chairman Ben Bernanke told Congress Thursday that the country's economic outlook has deteriorated and signaled that the central bank is ready to keep on lowering a key interest rate - as needed - to shore things up.

In remarks to the Senate Banking Committee, Bernanke said the one-two punch of the housing and credit crises has greatly strained the economy. Hiring has slowed and people are likely to tighten their belts further, as they are pinched by high energy prices and watch the value of their single biggest asset - their homes - weaken, he warned.

"The outlook for the economy has worsened in recent months, and the downside risks to growth have increased," Bernanke said. "To date, the largest economic effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so." Bernanke also said that the "virtual shutdown" of the market for subprime mortgages - given to people with blemished credit histories or low incomes - and a reluctance by skittish lenders to make "jumbo" home loans exceeding $417,000 have aggravated problems in the housing market.

Unsold homes have piled up and foreclosures have climbed to record highs.

"Further cuts in homebuilding and in related activities are likely," Bernanke cautioned.

Given all the dangers facing the economy, the Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," he said, indicating additional rate cuts were likely.

Bernanke appeared with Treasury Secretary Henry Paulson and Christopher Cox, chairman of the Security and Exchange Commission, amid increasing concerns that the economy may be drifting into recession.

The troubles in the housing and credit markets threaten to push the economy into its first recession since 2001 - if it hasn't fallen into one already.

Bernanke and Paulson didn't speak of a recession, noting that their forecasts still call for growth, albeit slow growth. However, the Fed and the Bush administration are expected to downgrade their economic forecasts for this year, given all the troubles, Bernanke and Paulson said.

"It would be less, but I do believe we'll keep growing," Paulson told the panel. Bernanke said the Fed's new forecast out next week will "show lower projections of growth ....growth looks to be weak, but still positive."

On Wall Street, Bernanke's bearish assessment of the economy pulled stocks lower. The Dow Jones industrials lost nearly 100 points in morning trading.

The Federal Reserve, which started lowering a key interest rate in September, recently turned much more aggressive. Over the span of just eight days in January, it slashed rates by 1.25 percentage points - the biggest one-month rate reduction in a quarter-century. Economists and Wall Street investors believe the Fed will cut rates even more at its next meeting in March and probably again in April.

"Our economy is clearly in trouble," said the committee's chairman, Sen. Christopher Dodd, D-Conn. Restoring investor and consumer confidence, he said, is critical "if we are going to get back on our feet again."

Bernanke said his forecast is for the economy to continue to endure a "period of sluggish growth." That would be "followed by a somewhat stronger pace of growth starting later this year" as the effects of the Fed's rate cuts and a newly enacted stimulus package begin to be felt. The $168 billion package, which includes rebates for people and tax breaks for businesses, was speedily passed by Congress last week and signed into law on Wednesday by President Bush.

Sen. Richard Shelby, R-Ala., though, believed the energizing impact of the rebates would be "negligible" and likened it to "pouring a glass of water into the ocean."

Even though Bernanke's forecast envisions an improving economic picture later this year, the Fed chief said it was nonetheless "important to recognize that downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated" or that credit will become even harder to secure.

That's why, for now, Bernanke indicated the Fed is still inclined to lower interest rates.

Yet, that could change, depending on how the economy and inflation unfold.

"A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives" of promoting healthy employment and economic growth while keeping inflation under control.

Inflation should moderate, Bernanke said. Yet last year's steep run-up in oil prices is a reminder that the Fed can't let down its inflation guard and must keep close tabs on the inflation expectations of investors, consumers and businesses. Those expectations can affect their behavior, which can affect the economy.

"Any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate" the Fed's job, he said.

Stimulus from the new rescue package also should help the faltering jobs market, Paulson said. He estimated that it would create "more than half a million jobs by the end of this year."

Meanwhile, the Bush administration's efforts to help homeowners at risk of losing their homes is paying off.

In the final three months of last year, more than 470,000 received help from the company servicing their mortgages and almost 30 percent of those received a loan modification, Paulson said.

Still, the secretary said more needs to be done. He called on Congress to revamp mortgage giants Fannie Mae and Freddie Mac and modernize the Depression-era Federal Housing Administration. He also asked Congress to pass legislation that will allow states to issue tax-exempt bonds and use the proceeds to help struggling homeowners refinance into more affordable mortgages.

The SEC is exploring the role of ratings agencies in the meltdown of subprime mortgages, Cox said. Critics allege ratings agencies didn't adequately assess risk when assigning ratings to certain complex mortgage securities.

Cox said he expects to receive preliminary reports from the agency's examinations in the coming months and a final report in the early summer.

Bernanke and Paulson have been fighting to keep the economy afloat. Foreclosures have climbed to record highs, financial companies have racked up multibillion-dollar losses from soured mortgage investments, Wall Street has convulsed, and employers have turned cautious in their hiring. Payrolls in January fell by 17,000, the first nationwide job loss in more than four years.

Economic growth practically stalled in the final three months of last year, and some economists believe it may actually be contracting now. By one rough rule of thumb, a recession occurs when there are two consecutive quarters - six straight months - when the economy shrinks.

WASHINGTON - A component of the U.S. government's tentative economic stimulus package announced Thursday would give an immediate lift to buyers and sellers in higher-priced housing markets.

The package agreed upon by Democratic and Republican members of the House would allow government-sponsored Fannie Mae and Freddie Mac to buy mortgages 50 percent more expensive than the current $417,000 (euro284,389) limit. The Senate and White House still must sign off on the proposed stimulus plan, which also includes tax rebates for Americans.

House Speaker Nancy Pelosi and Republican Leader John Boehner of Ohio announced the deal in a press conference Thursday.

The higher cap of $625,000 (euro426,243), to apply for one year, would breathe life into housing markets in New York, California and other pricey areas because lenders would feel more comfortable knowing Fannie and Freddie can buy and package the loans into securities that investors consider to be relatively safe.

A Freddie Mac spokesman said in an e-mail message that such an increase "would be in the best interest of the market and consumers."

To address the mortgage crisis, the package also raises limits on Federal Housing Administration loans, which are insured by the government in event of default, congressional aides said.

Groups representing Realtors, bankers and home builders, which have been hit hard by the mortgage market downturn, have been lobbying for such changes for months.

The National Association of Realtors has been pushing for a permanent expansion of the Fannie and Freddie limits to $625,000 (euro426,243). It calculates that borrowers could save $3,000 (euro2,046) to $5,000 (euro3,410) per year in reduced interest costs as a result and projects up to 210,000 foreclosures could be prevented since refinancing into lower-rate loans would be easier.

Dale Stinton, the group's chief executive, said in a statement Thursday that increasing the loan limits "is a truly meaningful economic stimulus and should be enacted quickly."

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WASHINGTON - The Federal Reserve unexpectedly slashed a key interest rate by a bold three-fourths of a percentage point on Tuesday, responding to a global plunge in stock markets that heightened concerns about a recession. The Fed signaled that further rate cuts were likely.

The reduction in the federal funds rate from 4.25 percent down to 3.5 percent marked the biggest reduction in this target rate for overnight loans on records going back to 1990. It marked the first time that the Fed has changed rates between meetings since 2001, when the central bank was battling the combined impacts of a recession and the terrorist attacks.

Federal Reserve Chairman Ben Bernanke and his colleagues approved the large rate cut after an emergency video conference on Monday night, a day when global markets had been pounded by rising concerns that weakness in the world's largest economy was spreading worldwide.

Despite the Fed's bold move, Wall Street plunged at the opening with the Dow Jones industrial average down 465 points before stocks began to rebound. The Dow was down 120 points in afternoon trading, an indication that the Fed's effort to calm markets was having an impact.

In a brief statement explaining its move, the Fed said that "appreciable downside risks to growth remain" and officials pledged to "act in a timely manner" to deal with the risks facing the economy. The action was approved on an 8-1 vote.

Analysts said the fact that the Fed did not wait until its meeting next week to cut rates underscored the seriousness of the situation.

"The world's stock markets are in meltdown so the Fed came in with an inter-meeting move to try to stop the panic," Christopher Rupkey, senior economist at Bank of Tokyo-Mitsubishi.

The Bush administration, which had announced on Friday that President Bush supported a $150 billion economic stimulus package, said Tuesday that it was not ruling out doing more than the $150 billion proposal if necessary. Bush and Treasury Secretary Henry Paulson were conferring with congressional leaders at the White House on Tuesday, with all sides saying they want to reach agreement quickly.

The Fed was expected to cut rates further, possibly as soon as their next meeting on Jan. 29-30, if there are continued signs that the economy is weakening.

"This move by the Fed was essential," said Lyle Gramley, a former Fed governor who is now a senior analyst with the Stanford Financial Group in Washington. "Bernanke promised in a speech earlier this month to take substantive action in a timely and decisive manner."

Gramley said that Bernanke was now exercising the kind of forceful leadership the markets had been hoping to see since the credit crisis hit in August.

David Jones, chief economist at DMJ Advisors, said Fed officials have a range of options available at next week's meeting from a quarter-point move to a half-point move to holding rates steady but indicating the Fed is prepared to move again between meetings should conditions deteriorate further. Jones predicted the Fed would lower the funds rate to 3 percent by the end of March.

In addition to cutting the funds rate, the Fed said it was reducing its discount rate, the interest it charges to make direct loans to banks, by a similar three-quarters of a percentage point, pushing this rate down to 4 percent.

Commercial banks responded to the Fed's action on the funds rate by announcing similar cuts of three-quarter of a percent on its prime lending rate, the benchmark for millions of business and consumer loans. The action will mean the prime lending rate will drop from 7.25 percent down to 6.50 percent.

Global financial markets had plunged Monday as investors grew more concerned about the possibility that the United States, the world's largest economy, could be headed into a recession. Many markets suffered their biggest declines since the September 2001 terrorist attacks.

In its statement, the Fed said it had decided to cut the federal funds rate "in view of a weakening of the economic outlook and increasing downside risks to growth."

The central bank said that the strains in short-term credit markets have eased a bit, but "broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."

Before Tuesday's move, the Fed had cut interest rates three times, beginning in September, the month after a severe credit crunch had roiled Wall Street and global financial markets. The Fed cut the funds rate by a half-point in September and then by smaller quarter-point moves in October and December.

"The committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risk," the Fed statement said.

The Bush administration is working on a number of fronts to combat the country's severe housing crisis but there is no simple solution to the problem, Treasury Secretary Henry Paulson said Monday.

Paulson, in remarks prepared for a New York speech, said that the country was facing an unprecedented wave of 1.8 million subprime mortgage which are scheduled to reset to sharply higher rates over the next two years. He said this raised the possibility of a market failure and was the reason the administration brokered a deal with the mortgage industry to freeze certain subprime mortgage rates for five years to allow the housing market to recover.

"By preventing avoidable foreclosures, we will safeguard neighborhoods and communities and fulfill our responsibility of protecting the broader U.S. economy," Paulson said in excerpts of his speech released by Treasury. "However, let me be clear: there is no single or simple solution that will undo the excesses of the last few years."

Paulson said that the deal the administration brokered with the industry to freeze certain subprime mortgage rates for five years did not involve the use of any taxpayer money. Conservative critics have complained that the administration's plan represented government intrusion in the operation of markets that would end up rewarding some people who had taken out risky mortgages.

The steep slump in housing has been a serious drag on the overall economy. There are rising fears that the country could topple into a recession. Those worries were heightened after a report Friday showing that the unemployment rate jumped to a two-year high of 5 percent in December with job growth slowing to a crawl.

Paulson called the current housing correction inevitable after what occurred during the five-year boom in which sales and prices climbed to record levels.

"After years of unsustainable price appreciation and lax lending practices, a housing correction is inevitable and necessary," Paulson said.

Treasury Secretary Henry Paulson said Tuesday the administration was exploring what would be a significant expansion of the program to help at-risk mortgage holders.

Paulson, in an interview on CNBC, said the administration was involved in discussions with the mortgage industry to expand a current program to freeze adjustable rate mortgages for five years to include borrowers of loans at prime rates. Currently, the rate freeze only covers a much smaller segment of adjustable rate loans, those made to subprime borrowers. Those are borrowers with weak credit histories.

"One thing we will consider with the HOPE NOW alliance is ... maybe expanding this beyond subprime borrowers to other borrowers," Paulson said in the CNBC interview.

Paulson did not provide any details on when this expansion might go forward. The HOPE NOW alliance is a coalition of mortgage industry companies which are seeking to reach at-risk borrowers to help them avoid foreclosures.

The administration last month unveiled its most significant move to date to deal with the mortgage crisis when it brokered an agreement with the mortgage industry to freeze rates on certain subprime mortgages for five years in an effort to help homeowners in danger of losing their homes when their lower introductory rates reset to sharply higher levels in the coming two years.

There are 1.8 million subprime mortgages that are scheduled to reset to higher rates this year and in 2009.

Paulson in the CNBC interview also called on Congress to quickly pass pending legislation that would reform the Federal Housing Administration, which he said would help 250,000 at-risk homeowners who have adjustable rate subprime mortgages refinance to more affordable loans and another piece of legislation that would expand the availability of so-called "jumbo" mortgages, loans higher than $417,000.

The two giant government-sponsored mortgage companies, Fannie Mae and Freddie Mac, cannot presently back these jumbo loans, which restricts their availability.

On Monday, Paulson had said in a speech in New York that the current housing correction was "inevitable and necessary" following five years of an unsustainable boom which saw sales and home prices hit record levels.

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