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Fed Chairman Bernanke outlines policymaker considerations

WASHINGTON — Federal Reserve policymakers weigh a broad range of economic scenarios to determine the right moves on interest rates during times of uncertainty, Fed Chairman Ben Bernanke said Friday.

"Uncertainty — about the state of the economy, the economy's structure and the inferences that the public will draw from policy actions or economic developments — is a pervasive feature of monetary policymaking," he said in remarks to the Federal Reserve Bank of St. Louis. A copy of Bernanke's remarks, delivered by video conferencing, was made available in Washington.

The Fed chief's discussion was mostly a scholarly one about challenges faced by policymakers over the years in trying to get the best handle on the economy's vital signs as well as a better grasp of the thinking of businesses and consumers whose behavior shapes overall economic activity.

"Notably, we now appreciate that policy decisions under uncertainty must take into account a range of possible scenarios about the state or structure of the economy," Bernanke said. "Those policy decisions may look quite different from those that would be optimal" under times of economic certainty, he said.

Bernanke didn't talk specifically about the current state of the economy or the future direction of interest rates in the United States.

The Fed meets next on Oct. 30-31. Some economists believe the central bank will lower rates again at that time. But others think the Fed might leave rates alone.

To cushion the economy from the ill effects of a credit crunch and severe housing slump, the Fed in September slashed a key interest rate by a half percentage point to 4.75 percent. It was the first time the Fed cut rates in more than four years.

Earlier this week, Bernanke warned that the housing slump will be a "significant drag" on economic growth into next year and that it will take time for Wall Street to fully recover from the credit crisis.

In those remarks to the New York Economic Club, Bernanke once again pledged to "act as needed" to help financial markets — which have suffered through several months of turbulence — to function smoothly and to keep the economy and inflation on an even keel.

Friday's remarks from Bernanke gave credit to William Poole, president of the Federal Reserve Bank of St. Louis, for helping policymakers better understand how to deal with economic uncertainty. Poole, who will retire next year, has done extensive research and analysis into the issue of how economic uncertainty affects the making of monetary policy.

Bernanke spoke of the importance of predictable and clear communications from the Fed with Wall Street and Main Street. That is something especially important when there's a level of uncertainty from businesses, consumers and investors about the economy's prospects.

He also said it was important to "avoid overreacting to current economic information" and to recognize the challenges of making up-to-date assessments of the sustainable level of economic activity and employment.

"Uncertainty about the current state of the economy is a chronic problem for policymakers," Bernanke said.

Against that backdrop, Bernanke said times of uncertainty are a powerful reminder of the need for humility in forecasting the future course of the economy.