US Federal Reserve chairman, Ben Bernanke, has indicated a change of tack for the Fed ahead of its now vital December 11 meeting.

In a speech delivered this morning (Australian time) in North Carolina, Bernanke indicated that the increased volatility in credit markets in recent weeks had “affected” the prospects of the US economy.

And he held out the prospects for slower economic growth in coming months as a result by saying:

I expect household income and spending to continue to grow, but 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.

The outlook has also been importantly affected over the past month by renewed turbulence in financial markets. The committee (the Federal Open Markets Committee of the Fed) will have to judge whether the outlook for the economy or the balance of risks has shifted materially.

Importantly, neither Bernanke nor vice chairman Donald Kohn (in a speech yesterday), repeated the language of last month’s Federal Open Market Committee statement that risks between growth and inflation were “roughly” balanced. Market economists and analysts interpreted that as ruling out a future rate cut.

Bernanke told the audience that uncertainty around the outlook is “even greater than usual,” requiring the Fed to be “exceptionally alert and flexible”. Yesterday, Kohn emphasised that the Fed would have to be ”nimble” in coming months.

Kohn said officials must take account of the “deterioration” in credit markets when they next meet.  Bernanke echoed that view:

Investors have focused on continued credit losses and write-downs across a number of financial institutions, prompted in many cases by credit-rating agencies’ downgrades of securities backed by residential mortgages.

The fresh wave of investor concern has contributed in recent weeks to a decline in equity values, a widening of risk spreads for many credit products (not only those related to housing), and increased short-term funding pressures.

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.

Needless to say, the Federal Reserve is following the evolution of financial conditions carefully, with particular attention to the question of how strains in financial markets might affect the broader economy.

The Fed has already cut its Federal Funds rate by three-quarters of one per cent.  Most economists in the US now expect at least a 0.25% cut on December 11, with a few punting on 0.50%.

Earlier in the day, the Fed and the markets were reminded that the housing crisis is getting worse: new home prices suffered their biggest drop since 1970 and jobless claims rose to a nine-month high.