Jan. 14 (Bloomberg) -- Federal Reserve officials, including Chairman Ben S. Bernanke, are signaling a more aggressive response to the increasing risk of recession.

Bernanke testifies to Congress on Jan. 17, two days after a government report that economists predict will show retail sales stalled last month after a gain of 1.2 percent in November.

The Fed chief and Governor Frederic Mishkin unveiled the new strategy last week, when they said in speeches that they favor greater ``insurance'' against the prospect of an economic downturn. That's a break from basing policy on central bank forecasts, which anticipate a continued expansion.

``They have been forced into a more aggressive stance simply because the market isn't paying attention to their medium-term forecast,'' said Drew Matus, senior economist at Lehman Brothers Holdings Inc. in New York. ``The market doesn't buy their glass-is-quarter-full view of the economy.''

Donald Kohn, the Fed's vice chairman, said in Jan. 5 speech that the officials decided to communicate more often with the public after the financial-market ``turmoil'' that began in August.

``We have tried to provide more information than usual to reduce uncertainty and clarify our intentions,'' Kohn said in a speech in New Orleans.

Deeper Cuts Anticipated

The remarks by Bernanke, 54, and Mishkin, who have collaborated on academic research, led traders to increase bets the central bank will cut its main interest rate by half a percentage point this month. The Fed has reduced the benchmark rate by 1 percentage point since September.

The dollar fell to a seven-week low against the euro as investors bet U.S. rates will fall below those of the 15 nations that share the euro for the first time in three years. The dollar fell to $1.4915, the weakest since declining to a record low on Nov. 23, and was trading at $1.4892 at 9:21 a.m. in New York, from $1.4776 late on Jan. 11.

While the Fed cut the benchmark rate in September by a half-point, more than anticipated, officials have since disappointed some investors by refusing to commit to a series of reductions.

When lowering borrowing costs in October and December by a quarter-point each, policy makers refrained from saying that growth was a bigger concern than inflation.

`Credit Shock'

``They underestimated the magnitude of the credit shock,'' said Brian Sack, senior economist at Macroeconomic Advisers LLC in Washington. ``Now they are catching up.''

Traders now expect at least a half-point reduction in the target rate for overnight loans between banks this month, according to contracts quoted on the Chicago Board of Trade.

Odds of 0.75 percentage point of reductions this month jumped to 34 percent, from zero on Jan. 10, futures show. That suggests some investors see the chance of a move before the Federal Open Market Committee meets Jan. 29-30, with an additional cut when it gathers.

``The Fed is moving in a very different direction,'' said former Fed governor Lyle Gramley, now a senior adviser at the Stanford Group in Washington. ``Risk-management is what they should be doing.''

Philadelphia Fed Bank President Charles Plosser, whom economists consider to be the toughest on inflation, said he's now most concerned about consumer spending.

`Open' to Rate Cuts

Plosser said he's ``certainly'' open to more rate cuts, in an interview with PBS's Nightly Business Report on Jan. 11. By contrast, when he spoke Nov. 27, he warned that the Fed's rate cut the previous month posed a risk to inflation expectations.

``The thing we are most concerned about right now is consumer spending,'' Plosser said.

Boston Fed President Eric Rosengren said the same day in South Burlington, Vermont, that declining house prices are likely to damp consumer and business confidence.

``Rosengren, Plosser and especially Mishkin arguably poured more gasoline on the fire,'' Ian Morris, chief economist at HSBC Securities USA Inc., said in a note to clients. ``The market is betting that the Fed may cut in an inter-meeting move,'' wrote Morris, who Jan. 10 doubled his rate-cut call for this month to a half-point.

Pelosi Meeting

Bernanke will have another opportunity to send signals on rates Jan. 17, when he testifies on the economic outlook before the House Budget Committee. He meets with House Speaker Nancy Pelosi today in Washington and will speak to all House Democrats at an annual retreat Jan. 30-Feb. 1.

Democrats in Congress are calling for fiscal measures to revive growth, while the Bush administration is considering measures of its own.

Policy makers' shift may have been driven by the Labor Department's Jan. 4 report showing the jobless rate jumped to 5 percent in December, economists said. The figures also showed the first decline in private-sector employment since 2003.

``We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,'' the Fed chief said to the Women in Housing and Finance and Exchequer Club in Washington on Jan. 10. ``The committee must remain exceptionally alert and flexible.''

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Last Updated: January 14, 2008 09:32 EST