"[S]evere financial instability, together with the associated declines in asset prices and disruptions in credit markets, can take a heavy toll on the broader economy if left unchecked," Bernanke said in his prepared remarks. "The developments in financial markets pose a significant threat to economic growth," he added.

The Chairman didn't explicitly say the Fed would cut rates by the end of the year, but he hinted that the Fed was ready to do whatever is necessary to tame markets. "In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate," he added.

To limit the impact of this turmoil, Bernanke highlighted the Fed's actions to inject liquidity into the system, including the latest effort to establish the Fed as a backdoor source in the commercial paper market.

"The Federal Reserve has taken a number of steps, including putting in place a temporary lending facility that provides financing for banks to purchase high-quality asset-backed commercial paper from money market funds." He added that the Fed has also increased the quantity of funds available.

Commenting on the announcement on Monday that the Fed will begin paying interest on bank deposits left at the Fed, Bernanke said, "Paying interest on reserves should allow us to better control the federal funds rate, as banks are unlikely to lend overnight balances at a rate lower than they can receive from the Fed."

On inflation, Bernanke said prices have been "elevated" due to commodity prices, but that prices show signs of decelerating. "These recent developments, together with economic activity that is likely to fall short of potential for a time, should lead to rates of inflation more consistent with price stability," he said.

The Chairman was speaking at the National Association for Business Economics 50th Annual Meeting, in Washington, DC.

By Patrick McGee, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, This email address is being protected from spam bots, you need Javascript enabled to view it

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