WASHINGTON (MarketWatch) -- Federal Reserve Chairman Ben Bernanke said that economic data to be released over the next eight days may contain the answer to the key question: whether to hold rates steady or lower them for the third straight meeting.
In a speech after receiving the award of the 2007 "Citizen of the Carolinas" from the Charlotte Chamber of Commerce, Bernanke played his cards close to the vest about the upcoming policy decision on Dec. 11.
He neither ruled a rate cut in, nor ruled one out. "We will be receiving a good deal of relevant information in the coming days. In making its policy decision, the FOMC will have to judge whether the outlook for the economy or the balance of risks has shifted materially," he said.
After the last Federal Open Market Committee meeting on Oct. 31, the FOMC moved to a "neutral" stance by suggesting that the risk of a serious downturn in growth or a serious upturn in inflation were roughly in balance. Fed watchers interpreted these remarks to mean the central bank wished to hold rates steady if possible on Dec. 11, unless circumstances changed.
Many economists now argue that circumstances have changed, as credit markets have frozen over the past few weeks in an eerie replay of the turmoil in August.
Bernanke noted this renewed turbulence, saying that the outlook has been "importantly affected" over the last month.
"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," he said.
"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," Bernanke added.
These comments might give succor to economists projecting a rate cut on Dec. 11 and more in coming months. Similar comments by Bernanke's top deputy, Donald Kohn, led to a sharp stock-market rally on Wednesday. See full story.
Inflation and jobs
But Bernanke also expressed a concern about inflation. He said that soaring gasoline and food prices and the weak value of the dollar in foreign-exchange markets have the potential to upset the apple cart of low and steady consumer prices.
The Fed was "monitoring inflation developments closely," he commented. This might give cheer to some Fed officials and others who argue that the central bank can't fight the disruptions in credit markets effectively by cutting short-term rates without risking letting the inflation genie out of the bottle.
Bernanke was quite clear about what the FOMC would focus on in terms of economic indicators. He gave special mention to the November unemployment report, which will be released Dec. 7.
At the moment, Wall Street economists are forecasting job growth of under 100,000 in November, for the fifth time since June.
"Continued good performance by the labor market is important for maintaining the economic expansion, as growth in earnings helps to underpin household spending," Bernanke said.
He pointed out that the labor market remained "solid" in October, with 130,000 new jobs added.
Initial jobless claims, a key weather vane for changes in labor market conditions, have "drifted up a bit," Bernanke added. But they remain "at a level consistent with moderate expansion in employment."
Many economists have argued that labor-market conditions will be key to upcoming Fed-rate decisions.
The Fed is also anxiously awaiting fresh data on consumer spending to be released this Friday and readings on consumer sentiment to be released on Dec. 7.
To date, Bernanke said that the incoming data since the Fed's last meeting on Oct. 31 has been "mixed."
The Fed chairman said household spending has been on the "soft side."
"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," according to Bernanke.
Investors, as measured by the federal-funds futures markets, are already set on a rate cut Dec. 11. Many economists initially took the Fed's word that it wanted to hold steady, but more are penciling in a December move.
In a separate speech Thursday, Fed Gov. Frederic Mishkin longed for the day that the public and media pay less attention to interest rates and focus more on the Fed's medium-term outlook, now that the central bank has decided to release its economic forecast four times per year. Read text of Mishkin's speech.
But that wish may likely have to wait for another day. 
Greg Robb is a senior reporter for MarketWatch in Washington.
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