Federal Reserve chairman Ben S Bernanke yesterday pledged "substantive additional action" to insure against "downside risks" to the US economy. His remarks during a luncheon speech in Washington reinforced the impression that the Fed will reduce its benchmark rate by at least half a percentage point this month, up from the quarter point widely forecast.

"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," he said.

With unemployment at a five year high and prices climbing in the US, and a spate of recession calls being made by investment banks and global institutions, the US Fed Reserve is undergoing a very challenging moment. (See: Recession in the US already a reality: Merrill Lynch and After Merrill, Goldman Sachs issues "outright recession call" for 2008)

Bernanke's assertion has come on the heels of a 4 January report by the US Labour Department, which revealed that the jobless rate had jumped to 5 per cent in December, along with a decline in private-sector employment.

Bernanke admitted that the forecast for 2008 ``has worsened'' and risks to growth are ``more pronounced.''

Investments in the housing sector have declined for seven consecutive quarters, and delinquency rates on sub-prime mortgages have climbed to 16.3 per cent in the third quarter, the highest in a decade. "The demand for housing seems to have weakened further, in part reflecting ongoing problems in mortgage markets,'' Bernanke said.

Payrolls have shown the first decline in private jobs since 2003 and the unemployment rate rose to 5 per cent, from 4.7 per cent the previous month.

"Should the labour market deteriorate, the risks to consumer spending would rise," Bernanke said in his prepared remarks to the Women in Housing and Finance and Exchequer Club. A cut in consumer spending, the chairman has implied, could further drag down the economy.

The Fed's last cut on 11 Dec last year, the third for the year, left the rate at a two-year low of 4.25%. This, however, prompted criticism from certain quarters that the chairman had probably failed to act aggressively enough to deal with the economy's problems.

Oil at one hundred dollar per barrel is only adding to the headaches for the Fed, for high oil prices can boost inflation as companies hike prices of goods and services.