Fed Chief Upbeat But Cautious Amid Mortgage Woes

Federal Reserve Chairman Ben Bernanke said he did not expect the escalating problems in the mortgage business to spread to the rest of the economy, but noted that the Fed had given itself “flexibility” to adjust interest rates should the outlook change for better or for worse.

In his first remarks on the economy since the Fed decided last week to leave rates unchanged - which has been instrumental in keeping mortgage rates unchanged of late - Bernanke did not stray far Wednesday from the monetary policy statement the central bank issued.

Inflation is still the predominant concern, and the economy does not appear to be in danger of slowing too much, but at the same time, the regulators remain watchful.

Analysts say the Fed appears on track to keep its key short-term interest rate steady, but investors appeared to read Bernanke’s comments as a sign that a home loan rate drop was somewhat less likely to happen soon.

Testifying before the Senate Joint Economic Committee, Bernanke offered a small window into the Fed’s thinking, saying that doubts about which path the economy might take prompted the central bank to leave itself some room.

“We are looking for a bit more flexibility, given the uncertainties that we are facing and the risks that are occurring on both sides of our outlook,” he said. “Those uncertainties have increased somewhat in recent weeks.”

He was careful to hedge his remarks with a firm reiteration of the Fed’s inclination to raise its interest rate, not lower them, given the high rate of inflation.

The hearing also allowed Ben Bernanke to wade deeper into the discussion about whether a rising number of bad credit mortgage defaults among risky borrowers - those who receive loans aimed at people with spotty credit histories - threatens the nation’s overall economic vitality.

Bernanke’s answer, in short, was probably not.

In recent months, numerous bad credit mortgage loan providers have reported serious financial problems. As homeowner defaults rise, dozens of lenders have gone out of business. Some large ones have filed for bankruptcy, and others have stopped issuing loans or tightened lending standards.

Many economists have expressed concerns that home loan market problems may exacerbate the slump in the housing market and, in turn, cause the economy to stall.

But Bernanke said the Fed believes that is unlikely to happen.

“The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained,” he said.

His picture of the economy was generally sanguine. The economy is likely to expand at a moderate pace this year and inflation is expected to decline. He expects business investment and consumer spending to continue growing.

Bernanke also said that he believed “it’s worth looking at” the possibility of Congress giving the bank the authority to enforce lender and mortgage broker regulations on providers not part of a banking institution.

SOURCE: International Herald Tribune