Image: Ben Bernanke
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“I am not suggesting the way forward will be easy,” Federal Reserve Chairman Ben Bernanke told the Economic Club of New York.
updated 10/15/2008 3:25:46 PM ET 2008-10-15T19:25:46

The country has sunk deeper into an economic rut, the Federal Reserve reported Wednesday, reflecting mounting damage from the financial and credit crises.

The Fed’s new snapshot of business conditions around the nation showed economic activity weakened across all of the Fed’s 12 regional districts. Consumer spending — which accounts for more than two-thirds of economic activity — slumped in most Fed regions. Manufacturing also slowed in most areas.

Some businesses had become more pessimistic about the economic outlook, the Fed said.

The survey was released shortly after Fed Chairman Ben Bernanke, in a speech in New York, warned that it would take time for the country’s economic health to mend even if badly needed confidence in the U.S. financial system returns and roiled markets stabilize.

“Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,” Bernanke said in a speech to the Economic Club of New York.

The government’s new powers under the $700 billion financial bailout package signed into law two weeks ago should help reduce risks to the economy, Bernanke said.

Tapping that new authority, the Treasury Department announced Tuesday that it will inject up to $250 billion in U.S. banks in return for partial ownership. It is hoped that banks will use the cash infusion to rebuild their reserves and lend money more freely to businesses and consumers.

The government also plans to buy rotten mortgages and other bad debts held by banks, another new power granted by the bailout package.

The rationale behind capital injections and buying bad debts is to unclog credit. That should help financial markets function more normally again and — in time — help the wobbly economy get back on stronger footing.

“We now have the tools we need to respond with the necessary force to these challenges,” Bernanke told the group. Still, he warned, “I am not suggesting the way forward will be easy.”

In an unprecedented action last week, the Fed and other major central banks sliced interest rates to prevent the financial crisis from plunging the U.S. — and the global economy — into a long and painful recession.

Major Market Indices

Many economists believe the Fed might lower its key rate — now at 1.50 percent — again later this month at its regularly scheduled meeting.

With the economy slowing, inflation should moderate, Bernanke said in his address.

Consumers are pulling back, raising the odds the economy will contract later this year and early next year. Some think the economy may have jolted into reverse in the recently ended third quarter. One classic definition of a recession is two straight quarters of contracting economic activity.

Shoppers are becoming more price conscious and credit is even harder to come by, factors sapping sales at the nation’s retailers, the report said. Given this, retailers foresee a “weaker economic outlook, including a slow holiday season,” the Fed said.

Vanishing jobs, shrinking paychecks, dwindling nest eggs and falling home values all are making consumers more cautious and less inclined to spend, slowing the overall economy. Retail sales, auto sales and tourism all turned weaker, the Fed said.

The Fed report is based on information supplied by the Fed’s 12 regional banks. The information was collected before Oct. 6, which began one of the worst weeks in Wall Street’s history.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Video: Fed’s pessimism

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