Fed chief sounds bleak
He calls rate cut unlikely as economy slows for rest of '07
Getty Images, July 18, 2007
Fed Chairman Ben S. Bernanke testifies before House Financial Services Committee.
WASHINGTON
Bernanke said that improvements in inflation might be only temporary, signaling that he doesn't favor lowering interest rates anytime soon. His comments came in his semiannual report on monetary policy to the House Financial Services Committee.
Fed economists, he testified, have lowered their growth forecast for 2007 by a quarter of a percentage point. The Fed in February had forecast growth of the gross domestic product at up to 3 percent this year. It now expects growth of 2.5 percent to 2.75 percent.
Bernanke's testimony underscored the housing sector's continued drag on the economy. "Conditions in the subprime mortgage sector have deteriorated significantly, reflecting mounting delinquency rates on adjustable-rate loans," which are at record levels, the Fed chief said.
And, he said, problems in the subprime market - which involves home loans to borrowers with weak credit histories - are spreading to other financial instruments.
"Credit spreads on lower-quality corporate debt have widened somewhat, and terms for some leveraged business loans have tightened," he said. Translation: Businesses with shakier balance sheets are finding it harder to get loans, and banks are less willing to lend for buyouts of companies if the deal involves issuing a lot of debt.
But these widening credit spreads - the difference in yields between different financial instruments - remain near the low end of the historical range, Bernanke warned, adding that bond and business loan markets remain brisk.
The Fed chairman devoted much of his testimony to what the Fed is doing to strengthen supervision of mortgage and home-equity lending. He expects to implement new rules to combat unfair and deceptive advertising in mortgage and home equity lending later this year.
Bernanke also acknowledged that he's considering supporting the idea of federally licensing mortgage brokers, whom Congress has blamed for many of the abuses and problems in the subprime mortgage market.
Economic growth next year is expected to be 2.5 percent to 2.75 percent, Bernanke said, while unemployment is expected to remain low at 4.75 percent, though that's slightly higher than this year.
"It struck me as a little cautious. I think the economy is going to be a little stronger than Bernanke indicated, but it's his job to be cautious," said Mark Vitner, senior economist for Wachovia, a large national bank based in Charlotte, N.C.
Vitner thinks a more robust rebound is in store as inflation threats ebb.
On inflation and interest rates, Bernanke signaled clearly that he doesn't expect the Fed's rate-setting body, the Federal Open Market Committee, to move its benchmark federal-funds rate anytime soon.
The rate has been 5.25 percent since June 2006. That's the overnight rate that banks charge one another, and it influences everything from mortgage rates to the interest charged for credit-card debt.
ka10"With the level of resource utilization relatively high and with a sustained moderation in inflation pressures yet to be convincingly demonstrated, the FOMC has consistently stated that upside risks to inflation are its predominant policy concern," he testified.
In other words, the threat of inflation remains greater than the need to lower lending rates to boost the slumping housing market.
Rep. Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, said that finding "troubles me."
In Frank's view, the biggest problem is the growing gap between low-wage and high-wage workers. Democrats have accused the Bush administration of not doing enough to narrow this gap.
Core inflation is expected to moderate this year and return to within the Fed's comfort zone - less than 2 percent - next year, Bernanke said. New Labor Department data yesterday showed that consumer core inflation grew at an annual rate of 2.3 percent for the first six months of 2007.
Core inflation measures the general rise in prices across the economy after stripping out volatile food and energy prices, whose short-term fluctuations can distort broader trends.
No comments:
Post a Comment