NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke, warning that higher inflation and weaker economic growth could be in store, told Congress Thursday that the central bank is keeping a close eye on the subprime mortgage crisis and recent spike in oil prices.

Bernanke, testifying before Congress' Joint Economic Committee, said the Fed expected growth to slow "noticeably" in the fourth quarter. But he also downplayed fears of a recession, saying the central bank expects the economy to grow next year, albeit at a more moderate pace than in recent quarters.

Since the Fed cut interest rates on Oct. 31, "financial market volatility and strains have persisted," Bernanke said.

"Incoming information on the performance of mortgage-related assets has intensified investors' concerns about credit market developments and the implications of the downturn in the housing market for economic growth," Bernanke said in his prepared remarks.

He also expressed concern that the rise in energy prices - oil is now trading at about $96 a barrel - could lead to both higher inflation and weaker levels of economic growth.

"In addition, further sharp increases in crude oil prices have put renewed upward pressure on inflation, and may impose further restraint on economic activity."

Wall Street interpreted Bernanke's comments as a sign that the Fed may now be more likely to cut a key short-term interest rate at its next meeting on Dec. 11.

The Fed lowered the federal funds rate, an overnight bank lending rate that impacts how much consumers pay for credit card debt, home equity lines of credit and auto loans, by a quarter of a percentage point on Oct. 31. That move followed a half-point rate cut on Sept. 18.

According to futures listed on the Chicago Board of Trade, investors as of late Thursday were pricing in an 88 percent chance that the Fed will lower the federal funds rate by a quarter of a point to 4.25 percent in December. Earlier this morning, traders were pricing in a 70 percent chance of a rate cut.

"The Fed may be forced into further easing," said Ashraf Laidi, chief currency analyst with CMC Markets U.S, a currency brokerage firm. "The Fed may cut rates even it doesn't want to."

Nonetheless, stocks fell Thursday and one market expert said investors might now be worrying about the possibility of stagflation: sluggish economic growth combined with inflation.

"The Fed is in a tight spot. It's hard to combat deflation in housing and inflation in commodities spurred by a falling dollar at the same time," said Mike Larson, an analyst with Weiss Research, an investment research firm based in Jupiter, Fla.

However, Bernanke also said that recent economic data releases "suggest the overall economy remained resilient in recent months."

But in opening remarks before Bernanke's testimony, Sen. Charles Schumer (D-N.Y.), the chairman of the joint economic committee, said that he has begun to worry about the threat of a recession.

"I think we are at a moment of economic crisis stemming from four key areas: falling housing prices, lack of confidence in creditworthiness, the weak dollar and high oil prices," Schumer said. "Each of these problems alone would be enough of a threat to our economic well-being. But taken together, they are essentially the four horsemen of economic crisis."

For his part, Bernanke said during a question-and-answer portion of the hearing that "the spillover to the economy from housing still appears to be limited" and that it was the Fed's hope that the housing market would "find a bottom" by next spring.

Bernanke declined to specifically answer a question from Schumer about what, on a scale of 1 to 10, he thought the chances of a recession were.

A recession has historically been defined as two consecutive quarters of declines in gross domestic product. But the National Bureau of Economic Research now officially defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months."

On Thursday, Bernanke warned that delinquencies for subprime mortgage borrowers are likely to rise further but that the Fed will continue to work with community groups to help borrowers avoid foreclosure.

What's more, he said that the Fed is on track to "propose rules by the end of this year to address unfair or deceptive mortgage lending practices" that would "apply to subprime loans offered by any mortgage lender."

When the Fed cut rates on Oct. 31, it cited an "intensification" in the housing market's weakness.

But the central bank also hinted in its statement that it may not cut rates again at its next meeting since it felt that "strains in financial markets have eased somewhat."

That was before a slew of negative developments from financial institutions that have caused investors to worry about problems stemming from the subprime mortgage meltdown.

Since the Fed cut rates, Citigroup (Charts, Fortune 500) announced that CEO Charles Prince had stepped down and that the bank could report up to $11 billion in mortgage-related losses in the fourth quarter.

On Wednesday, savings and loan Washington Mutual (Charts, Fortune 500) warned that the housing slump would last into 2008, investment bank Morgan Stanley (Charts, Fortune 500) announced it would take a $3.7 billion loss in its fiscal fourth quarter due to subprime exposure and insurer AIG (Charts, Fortune 500) reported lower-than-expected profits, partly due to debt-related investments that soured.

Bernanke said Thursday that estimates about financial institutions eventually losing $150 billion as a result of the subprime debacle were "in the ballpark."

The Dow Jones industrial average plummeted 361 points on Wednesday due to credit market fears - the fifth-largest decline this year. The Dow has fallen 4.5 percent in the past week.

And the market had a roller coaster day Thursday. Tech stocks took it on the chin but the Dow and S&P 500 rallied at the end of the day to pare their losses.

Speculation that China, a big holder of U.S. dollars, may reduce its exposure to the greenback in light of the dollar's weakness also has contributed to market volatility as of late.

But in the question-and-answer session, Bernanke said he was not concerned about any change in the currency investments of China or other countries for that matter.

In his testimony, Bernanke said that the Fed would "act as needed" in order to make sure that it can keep inflation under control as well as maintain "sustainable economic growth."

Other committee members urged Bernanke to cut rates in December, however.

Rep. Carolyn Maloney (D-N.Y.), the vice chair of the committee, said before Bernanke's testimony began that she did not believe inflation was a threat and noted the rise in the unemployment rate over the past few months.

And Sen. Sam Brownback (R-Kan.), a committee ranking member, said the economy is at a "crossroads" and that the Fed should cut rates in December to increase consumer confidence and spending ahead of the holidays.

But Weiss Research's Larson wondered if there is anything the Fed can do to keep the economy on track since a rate cut might make inflation worse while no rate cut might prolong the pain in housing.

"The Fed has to decide what is the lesser of two evils: helping the housing market or being tougher on inflation," Larson said. "The reality is dawning on investors that the Fed can't fix every problem facing the market." 

NEW YORK (CNNMoney.com) -- Stocks fell sharply Friday, with the Dow ending over 200 points lower, as mortgage-induced losses at Wachovia and Fannie Mae riled traders already nervous that the woes could spread to the wider economy.

The 30-share Dow Jones industrial average (Charts) lost about 1.7 percent and the broader S&P 500 index (Charts) fell 1.4 percent.

The tech-fueled Nasdaq (Charts) got hammered, tumbling 2.5 percent.

"It got pretty ugly," said Alec Young, an equity strategist at Standard and Poor's Equity Research. "There's just an unprecedented number of negatives coming at the market."

Those negatives include the triple threat of restricted access to credit, a downturn in the housing sector and near record oil prices, said Young.

"People are more and more worried about recession," he said.

For the week, the Dow lost 4.1 percent, while the S&P fell 3.7 percent. The Nasdaq was the biggest loser, dropping 6.9 percent.

Here's what moved markets on Friday:

Wachovia (Charts, Fortune 500), the nation's fourth-largest bank, said this morning the complex debt instruments it held in its portfolio declined in value by an estimated $1.1 billion before taxes in October, leading to a $600 million loan-loss charge for the current quarter. The bank had reported $1.3 billion in pre-tax losses in the third quarter tied to pools of debt backed by home loans.

Fannie Mae (Charts), the largest buyer and backer of home loans in the country, said Friday its profits fell by half over the last nine months.

The government-sponsored company said it earned $1.17 a share from January through September, down from $3.5 billion, or $3.16 a share, in the same period last year. Its shares fell more than 6 percent.

Stocks have sold off as traders worried about the wider economic impact of losses at financial companies and the growing ranks of consumers saddled with expensive mortgages and high energy bills.

"The fear is spreading," said Joe Battipaglia, chief investment officer at Ryan Beck & Co. "Investors think profits may have hit their peak, not just in finacials but across other sectors of the economy."

The losses from Wachovia and Fannie come after Citigroup (Charts, Fortune 500) said last week it expects to write down a further $8 billion to $11 billion in the fourth quarter due to credit- and mortgage-related problems. Citigroup and warnings of more write downs from other banks caused the Dow to lose 362 points last week.

On Wednesday, the Dow posted one of its biggest single-day declines, falling 361 points on further credit market fears.

In recent months, banks and other financial institutions have taken big losses on mortgage-backed securities, which package individual home loans and sell them as an investment.

Those investments soured when people started defaulting on loans because of the decline in the real estate market, which ended their hopes of refinancing on the back of rising home values.

Adding to investor woes was a weak growth forecast from the 27-nation European Union, which said growth is expected to slow to 2.4 percent next year and in 2009, down from 2.9 percent this year. The EU attributed weaker growth to problems stemming from the subprime mess in the United States and the increase in oil prices.

The University of Michigan report on consumer sentiment came in well below estimates but did little to move markets.

A bit of positive news: The U.S. trade deficit fell to the lowest level in 28 months as a falling dollar helped boost exports.

Among stocks in the news Friday, Merck (Charts, Fortune 500) announced it will pay $4.85 billion to resolve most of the 27,000 claims involving its blockbuster pain medication Vioxx. Merck shares climbed nearly 4 percent.

Disney (Charts, Fortune 500) reported earnings that beat expectations on sales that were roughly in line with analysts' estimates.

Clearwire (Charts) and Sprint Nextel (Charts, Fortune 500) said they ended an earlier agreement to build a high-speed wireless network.

Meanwhile, oil prices resumed their assault on $100 a barrel. U.S. light crude for December delivery rose 86 cents to settle at $96.32 a barrel on the New York Mercantile Exchange.

The dollar fell against the euro but rose slightly against the yen. Treasury prices rose, with the yield on the benchmark 10-year note falling to 4.22 percent. Bond prices and yields move in opposite directions.

Major markets in Asia and Europe finished lower on mounting credit fears.

Market breadth was negative. Losers topped winners by 2 to 1 on the New York Stock Exchange as 1.35 billion shares traded hands. Decliners beat advancers by 2 to 1 on volume of 2.32 billion shares.

COMEX gold lost $2.80 to settle at $834.70 an ounce. 

LONDON (CNNMoney.com) -- The prospect of rating downgrades on complex debt instruments, along with massive writedowns at big banks, are raising fears that the credit crisis may deepen.

Collateralized debt obligations backed by mortgage securities are triggering another wave of worry on Wall Street. Banks have been hard-hit by a decline in the value of these securities, and investors and traders worry that more losses could result if prices fall further.

CDOs are pools of bonds that are sliced into so-called tranches with different levels of credit risk. As delinquencies on home loans given to borrowers with weak credit has risen, rating agencies have started to warn that these securities may not be as creditworthy as they previously thought.

The three major rating companies - Moody's, Standard & Poor's and Fitch - have put an estimated $70 billion worth of collateralized debt obligations, including those with the highest ratings, on review for downgrading.

Fitch said Tuesday that structured finance CDOs it had rated are "clearly underperforming." The agency placed 150 transactions representing about $37 billion on negative rating watch.

Investors are growing increasingly nervous as downgrades have started spreading to high-quality CDOs. One key indicator of the spreading problem is the ABX, an index traders use to track subprime securities. The part of the ABX that tracks AAA-rated mortgage-backed securities issued in early 2007 fell to 82.72 cents on the dollar on Wednesday, a drop of roughly 14 percent in the past month.

More turmoil in the CDO market could result in further losses at Wall Street's leading investment banks. Merrill Lynch & Co. Inc. (Charts, Fortune 500) wrote down $7.9 billion in the third quarter due to losses from subprime loans and collateralized debt obgliations, while Citigroup Inc. (Charts, Fortune 500) reported a $1.56 billion loss related to its CDO positions.

S&P analyst Victoria Wagner said in a conference call on Thursday that bank earnings are likely to remain under pressure through the rest of the year due to further markdowns on loans and mortgage-related securities.

The downgrades of the CDOs come after the ratings firms have already downgraded billions of mortgage-backed securities. On Oct. 11, Moody's said it cut ratings on $33.4 billion of securities backed by subprime home loans.

The big three firms have been at the center of the subprime storm, drawing fire for not forewarning investors about the mortgage mess. The agencies have reevaluated the way they rate mortgage-backed and other complex securities, although some critics say credit ratings have been irreparably undermined as a result of the summer turmoil. 

(Fortune Magazine) -- This past summer's subprime meltdown involved about $900 billion in now-suspect securitized debt, reckless lending, and consumers who buckled under the weight of loans they couldn't afford. Now another link in the consumer debt chain - credit cards - is starting to show signs of strain. And the fear that the $915 billion in U.S. credit card debt (an uncannily similar figure) may blow up has major financial institutions like Citigroup, American Express, and Bank of America strapping on their Kevlar vests.

Last month, as banks reported their worst quarterly results since 2001, concerns about rising credit card delinquencies began to make their way onto earnings announcements alongside mentions of subprime woes.

In describing the situation to analysts, CFO Gary Crittenden said Citi's credit card holders were beginning to increase the balance on their cards or take cash advances on those cards for the first time - behavior that, in his experience (which includes seven years as CFO of American Express), can translate into future trouble. Citi said the change in loan losses was "inherent in the portfolio but not yet visible in delinquencies."

Then American Express (Charts, Fortune 500) said that it too was seeing "signs of stress" and would boost its loss reserves in its core U.S. card unit by 44%. Capital One (Charts, Fortune 500), Bank of America (Charts, Fortune 500), and Washington Mutual (Charts, Fortune 500) all said they are bracing for a 20% or higher increase in credit card losses over the near and medium term.

So are U.S. credit cards going to be the catalyst for the next seizing up of the global credit markets? It depends on whom you ask.

"We are in a heightened state of alert to monitor a potential domino effect," says Michael Mayo, Deutsche Bank's U.S. banking analyst.

Dennis Moroney, an analyst at TowerGroup, expects credit card delinquencies will rise as consumers, who have until now used home-equity lines of credit to pay off their cards, start ratcheting up higher card debt. When housing prices were rising, it was easy for consumers to tap the escalating values of their homes to keep borrowing. With the home-equity spigot turned off, over-leveraged consumers may have trouble keeping up with payments.

The doomsday scenario would play out something like this: Just like CDOs and other asset-backed securities, credit card debt is sliced, diced, and sold off again as packages of securities. Rising delinquencies would hurt not only the banks involved but the securities backed by the credit card receivables. Those securities would decline in value as consumers defaulted, leading to bank losses as well as portfolio losses in the hedge funds, institutions, and pensions that own the securities. If the damage is widespread enough, it could wreak havoc on the economy much as the subprime crisis has done.

To be sure, there are key differences between the subprime market and the problems brewing with credit cards. The first is that while rising mortgage delinquencies were apparent for months before the subprime market blew up, credit card delinquencies are actually coming off unusually low levels.

"This is absolutely not the next one to blow," says Meredith Whitney, banking analyst at CIBC. Christopher Marshall, CFO of Fifth Third Bancorp in Cincinnati, points out that the U.S. has a long history of credit card securitization, "so it's fairly well understood." The securitization of the subprime sector, by comparison, "got blurry, and people didn't focus on what it meant."

Credit agencies that monitor credit cards in the asset-backed securities market share that confidence. "The performance in the core consumer [asset-backed securities] sectors is expected to deteriorate modestly, but not enough to cause substantial downgrades," says Kevin Duignan, managing director at Fitch.

But credit card debt is different from subprime debt in another way: Unlike mortgages, credit card debt is unsecured, so a default means a total loss. And while missed payments are at a historical low, they show signs of an uptick: The quarterly delinquency rate for Capital One, Washington Mutual, Citigroup, J.P. Morgan Chase, and Bank of America rose an average of 13% in the third quarter, compared with a 2% drop in the previous quarter.

What's more, consumers and the people who market financial services to them may not have learned their lesson. Klaus-Peter M黮ler, CEO of Germany's Commerzbank, told Fortune he was stunned on a recent trip to the U.S. to see TV ads still aggressively touting no-questions-asked credit. In Germany he's calling for tighter standards.

"I'm speaking out on the ethical questions about consumer lending," he says.

If there is an international precedent the U.S. should be watching, it's actually that of the U.K. British consumers are just as overstretched as Americans, but since the real estate market there rose faster and fell earlier, they're about 18 months ahead in the credit cycle. Since the last quarter of 2005, credit card delinquencies and charge-off rates in Britain have risen as much as 50%, forcing banks to take huge write-offs.

It's a sign of the times that, according to one survey last month, 6% of British homeowners have been using their credit cards to pay their mortgages. That's suicidal, of course, given that credit card interest rates are more than double even the heftiest mortgage. Keep your fingers crossed that it's not a trend that crosses the Atlantic.