Fed to Meet as Housing, Bad Credit Mortgage Worries Grow
Federal Reserve policy makers are facing fears of a worsening housing market and a painful credit crunch and their impact on Wall Street.
Fed Chairman Ben Bernanke and his central bank colleagues are to meet today to assess economic conditions. Especially among investors since the Fed’s last gathering in late June, concerns have grown that problems in both the troubled housing and bad credit mortgage markets are spreading.
That could pose a risk to the broader financial system and the economy.
“The Federal Reserve’s list of worries got longer,” said Brian Bethune, economist at Global Insight. “We are seeing a continued unwinding of the housing sector, and we’re getting tighter lending conditions. I think that is going to provoke a lot of discussion about what is happening in the home loan markets and the overall availability of credit.”
The free flow of credit is vitally important to smooth functioning of the national economy. Increasingly restrictive lending conditions can put a damper on peoples’ ability to buy big-ticket items such as homes, cars and appliances.
It can crimp businesses’ capital investment and hiring. That appetite (or lack thereof) by businesses and consumers would slow economic activity.
Dissecting the current situation that has led to turbulence on Wall Street in recent weeks, and charting out possible scenarios for the economy is something Bernanke and his colleagues will be focusing on during their closed-door deliberations.
Economists believe that Fed policymakers — in the brief statement released after the meeting — will acknowledge the difficulties associated with housing and tightening home mortgage loan credit and will seek to strike a reassuring tone that the resilient economy will work its way through those challenges.
It’s a delicate dance.
The Fed wants to send a comforting message that it is on top of things, but at the same time it doesn’t want to be viewed as being overly optimistic or pessimistic.
Against this backdrop, the Fed is widely expected to leave an important interest rate at 5.25 percent. In turn, commercial banks’ prime rate for certain credit cards, a home equity line of credit and other loans — would stay at 8.25 percent.
The central bank’s key rate hasn’t budged for more than a year. Before that, the Fed raised rates for two years to fend off inflation.
The Fed is expected to repeat its concern that a big risk to the economy is if inflation doesn’t recede as policy makers currently expect.
Core inflation — excluding food and energy prices — has moderated. These prices rose 1.9 percent over the 12 months ending in June, down from a 2 percent annual gain for May.
Fed policymakers, however, say they want to see a string of steady improvements before they are willing to downgrade the risk of inflation.
After nearly stalling in the first quarter of this year, economic growth rebounded in the April-to-June period at a brisk 3. 4 percent pace.
That bounce back came despite a drag on economic activity from the sour housing market and a much smaller appetite by consumers to spend.
Growth in the July-to-September quarter probably will slow to around a 2.5 percent pace, analysts said.
Many economists still believe the Fed will hold interest rates - which correlate in large part to the mortgage rates applicants face - steady through much, if not all, of this year. Investors, however, are again upping the odds of a rate cut.
“Market circumstances over the past month will certainly challenge the stability of monetary policy,” said Carl Tannenbaum, chief economist at La-Salle Bank.
“On the one hand, economic fundamentals are not at all bad,” he said “On the other hand, in recent weeks it appears segments of the financial industry have become paralyzed. The resulting restriction in the flow of credit through the economy represents a significant risk to the expansion.”
SOURCE: Arkansas Democrat Gazette