The report, to be used by its policymakers for their October 28-29 meeting on interest rates, offered no surprise in its survey of the past few weeks during a period of heightened market turmoil and tight credit.

The report said activity 'weakened in September across all 12 Federal Reserve districts'. It added that several districts 'also noted that their contacts had become more pessimistic about the economic outlook'. Consumer spending fell in most regions, with declines reported in retailing, auto sales and tourism, and manufacturing remained weak along with real estate, the report said.

The few bright spots were that 'agriculture and natural resources were mostly positive,' despite hurricanes that affected some areas of the country.

Another positive was that 'inflationary pressures moderated a bit' as conditions weakened.

But the report suggested the banking sector continued to struggle.

'Credit standards were tightened, particularly for commercial and residential real estate loans, in several districts,' the report said.

'Several also indicated that lenders in their district had become more highly cautious and more conservative ... Some districts also mentioned customers taking steps to ensure that existing deposits are covered by insurance and noted deposit withdrawals after reports of bank closings during September. Liquidity problems in inter-bank markets along with a higher cost of funds were reported in several districts.'

The Fed meeting will be held after it joined other central banks in a coordinated global half-point interest rate cut October 8 in an effort to jump-start bank lending. The federal funds rate is now at 1.5 per cent and many analysts see a further cut at the upcoming Federal Open Market Committee meeting.

'To further improve financial market conditions and protect against a severe recession, we expect that the FOMC will lower interest rates from its current 1.5 per cent to 1.0 per cent before year's end,' said Mr Ryan Sweet at Economy.com.

'If credit conditions do not show sustainable improvement, the central bank will cut rates by 50 basis points at its coming meeting, bringing the cumulative easing for October to a full percentage point. Going much lower than a 1.0 per cent fed funds rate would be difficult, because it would lower the return on money-market funds below costs.'

Fed chairman Ben Bernanke said in a speech earlier on Wednesday that a recovery from the financial crisis 'will not happen right away' but that the US economy will eventually emerge 'with renewed vigour'.

Mr Bernanke said the crisis 'has many novel aspects' stemming from the globalisation of markets and quick movements of money and information but that 'the current situation also has much in common with past experiences'.

The Fed chairman did not use the term recession, as mentioned by San Francisco Fed president Janet Yellen on Tuesday, but he suggested the economy would remain weak for some time.

The main problem, Mr Bernanke said, is 'a loss of confidence' in markets and financial institutions.

The massive US$700 billion (S$1 trillion) rescue approved by US lawmakers and similar measures in other countries will go a long way toward steadying markets, he said. -- AFP