Ben Bernanke, the Chairman of the Federal Reserve, paved the way last night for US interest rates to be cut to an unprecedented low of under 1 per cent this month, and sought to reassure markets that the Fed could deploy other weapons from its arsenal even if it were forced to cut rates to zero.

The Fed chief’s clear signal that US official rates are set to be cut to less than 1 per cent at the central bank’s next policy meeting, on December 15 and 16, came as the American economy was formally declared to be in a recession that is now judged to have begun in December last year.

Despite another spate of dire news on US economic conditions, the Fed chief insisted that talk of a repeat of the Great Depression of the 1930s was overblown and vowed to do everything necessary to avoid that. “You hear a lot of loose talk,” he said. “Let us put that out of our minds – there’s no comparison in terms of severity.” He added: “Our nation’s economic policy must vigorously address the substantial risks to financial stability and economic growth that we face.”

In a move to calm market fears that the Fed could run out of ways to fend off a deep recession if rates drop to zero, Mr Bernanke pointed to its other, radical options, such as injecting money into the economy by buying up long-term US Treasury bonds or other securities in a way that would drive down market interest rates.

“Although conventional interest-rate policy is constrained by the fact that nominal rates cannot fall below zero, the second arrow in the Federal Reserve’s quiver, the provision of liquidity remains effective,” he said.

“Secondly, the Federal Reserve can backstop liquidity not only to financial institutions but also directly to financial markets, as we have recently done for the commercial paper market.”

His comments, in Austin, Texas, came as experts on the Business Cycle Dating Committee of the National Bureau of Economic Research, a think-tank, said that they judged the US economic cycle to have peaked in December 2007 – effectively putting a date on the start of a new US recession that economists fear is likely to be the deepest in America since the early 1980s.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive