WASHINGTON -- Federal Reserve Chairman Ben Bernanke signaled Monday that officials will hold nothing back in their support of financial markets and the economy, calling further interest rate cuts from already low levels "certainly feasible."

In prepared remarks to an economic conference in Texas, Mr. Bernanke also said the Fed's powers don't end with the federal funds rate, and its ability to inject liquidity into markets through its balance sheets "remains effective."

Ben Bernanke

While officials will at some point need to bring short-term interest rates and liquidity back to more sustainable levels, "that is an issue for the future," Mr. Bernanke said in the text of his remarks to the conference in Austin, Texas.

"For now, the goal of policy must be to support financial markets and the economy," Mr. Bernanke said. (Read the full text of Bernanke's remarks.)

Among the Fed's options, Mr. Bernanke said, are direct purchases of Treasurys and securities issued by government-sponsored enterprises "in substantial quantities" to affect yields, "thus helping to spur aggregate demand."

He cited the Fed's announcement last week that it will buy up to $600 billion in GSE debt and GSE-backed mortgage securities and called it "encouraging" that the announcement of that measure has brought mortgage rates down.

The Fed can also channel liquidity to certain segments of the financial markets, Mr. Bernanke said, citing the Fed's recent measures to support the commercial paper market.

Mr. Bernanke said the U.S. economy "remains under considerable stress" and that after contracting 0.5% at an annual rate in the third quarter, "economic activity appears to have downshifted" after September.

Reflecting that assessment, the Institute for Supply Management's November manufacturing index, released Monday, fell to its lowest level since 1982. Meanwhile construction spending posted a steeper-than-expected drop in October, according to government figures. (See related article.)

The November employment report, due for release Friday, is expected to show a plunge in nonfarm payrolls in excess of 300,000 with a further increase in the unemployment rate.

Indeed, Mr. Bernanke said weekly jobless claims figures "suggest that labor market conditions worsened further in November." And with labor and credit conditions worsening, consumer spending is "on a pace to post another sharp decline in the fourth quarter," he said.

The National Bureau of Economic Research, an academic group that determines when recessions occur based on a series of indicators, on Monday officially declared that the U.S. is in fact in a recession that began last December. (Read more.)

To prevent a deeper and prolonged recession, Fed officials are expected to lower interest rates at their Dec. 15-16 policy meeting, a view supported by Mr. Bernanke's remarks Monday.

The target federal funds rate already sits at just 1%, matching lows last seen in 2003 and 2004. Further cuts would put the funds rate at levels not seen in a half-century.

Yet even if the fed funds rate approaches zero -- as a growing chorus of Wall Street economists expect -- the Fed still has considerable sway over markets and the economy through its balance sheet.

That firepower was evidenced last week by the Fed's decision to provide a loan backstop for the government's bailout of Citigroup Inc. and purchase GSE and GSE-backed mortgage securities.

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

Mr. Bernanke was upbeat on the outlook for inflation, saying that with commodity prices down "dramatically," inflation "appears set to decline significantly over the next year toward levels consistent with price stability."

Write to Brian Blackstone at brian.blackstone@dowjones.com