Wall Street suffered another another day of tempestuous trading after Ben Bernanke, the Chairman of the Federal Reserve, fuelled fears over the economic fallout from the credit squeeze but undercut hopes of further, early cuts in US interest rates with a renewed alert over inflation dangers.

A stark assessment of American prospects from the Fed Chairman combined with a warning from Cisco Systems, the technology bellwether, over a bleak outlook for US business investment, to send Wall Street’s blue-chip shares tumbling once again.

After Wednesday’s plunge of more than 360 points, US stocks were hit by another wave of turbulence.

The tech-laden Nasdaq finished down 52.76 points, or 1.92 per cent, at 2,696.00, as Cisco’s worries sent it on the worst two-day percentage fall in five years. In early afternoon trading the Dow Jones industrial average was down 160 points, or 1.2 per cent, while the broader-based S&P 500 index was down by 1.3 per cent. However, key indices bounced back in late trading, helped by a recovery in financial shares. The Dow closed down 33.73 points or 0.25 per cent, at 13,266.29, with the S&P down just 0.85 points, or 0.06 per cent, at 1,474.77.

Despite Mr Bernanke also pouring more cold water on markets’ expectations that the Fed will bring relief to investors with a new interest rate cut next month, the dollar was also battered once again on currency markets.

Generally, the prospect of higher than anticipated interest rates bolsters currencies, but the Fed chief’s latest signal that US interest rates could stay on hold into next year offered little support to a beleaguered dollar. The US currency sank to another record low on its trade-weighted index. The euro climbed to $1.4703, not far from Wednesday’s record high of $1.4730, even after a firm indication from the European Central Bank yesterday that its previous plans for a further rise in eurozone interest rates will now stay on hold for some time.

Mr Bernanke, in testimony to Congress’s Joint Economic Committee, forecast that American growth will slow sharply in the present quarter and was “seen as remaining sluggish during the first part of next year”, with tightening lending conditions triggered by the credit squeeze intensifying the US housing slump. He predicted some recovery in the second part of next year.

But the Fed Chairman reinforced the US central bank’s clear signal last week that its anxieties over inflationary pressures, stoked by the plunging dollar and soaring oil prices, meant it will be in little hurry to cut rates again.

On the impact of record oil prices, which yesterday fell back below $96 a barrel from record highs above $98 earlier this week, Mr Bernanke said: “Recent increases in energy prices will likely lead overall inflation to rise for a time . . . Further sharp increases in crude oil prices have put renewed upward pressure on inflation.” He added that the dollar’s decline “has the potential to raise import prices and contribute to inflation and therefore we are very attentive to that risk”.

“We’re going to make sure that the inflationary impact that may come from a weakening dollar is not passed into broader prices . . . ” he said. He played down any risk to the dollar posed by mooted changes by China in its reserve holdings, saying that he was “not particularly concerned” over this.

Challenged over whether the Fed’s two interest rate cuts since October could be seen as a lifeline to irresponsible banks, Mr Bernanke also insisted: “We’re not bailing out anyone.”

But he expressed incredulity at the lack of scrutiny by US institutions of complex securities on which they were now suffering heavy losses. “It’s surprising that sophisticated investors essentially looked at the credit ratings,” he said. “They didn’t do due diligence and they didn’t see what is in there.”

Despite worries that some US banks have been slow to admit their hits from losses on sub-prime mortgages and off-balance sheet vehicles, the Fed Chairman said that he believed Wall Street institutions “are being aggressive” in marking down assets. He said that US Treasury-backed plans for a “super fund” to take some asset-backed securities off banks’ hands could help, but this “depends on the execution”. Such assets should go into the fund at a “fair value”, he argued.

Euro’s brutal rise

Jean-Claude Trichet, the President of the European Central Bank, fired a warning shot at currency markets yesterday over the “brutal” rise in the euro against the embattled dollar.

In what currency traders took as an apparent attempt at verbal intervention to stem the euro’s rapid appreciation, Mr Trichet said: “I have observed [currency] moves that I would say were undoubtedly sharp and abrupt, and I have said already that brutal moves are never welcome.”

Economists expressed doubt that the comments would succeed in reining in the euro’s gains.

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