Wednesday, March 28, 2007
Bernanke: Mortgage Woes Not Spreading
Bernanke: Economic Expansion Not Running Out of Steam
Wednesday March 28, 11:32 am ET
By Jeannine Aversa, AP Economics Writer
Bernanke doesn't believe the nation will slip into a recession, rejecting the notion raised by predecessor Alan Greenspan that the economy's expansion could be in danger of fizzling out.
"At this juncture ... the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained," Bernanke said in testimony to Congress' Joint Economic Committee.
It marked Bernanke's most extensive discussion yet of the mounting problems in the risky mortgage market. Those troubles raise "some additional questions about the housing sector," which has been mired in a deep slump for more than a year, Bernanke said.
Fallout in the risky mortgage market is clobbering some lenders and homeowners and has stoked concerns on Wall Street, Capitol Hill and elsewhere.
So-called "subprime" lenders who make home loans to people with blemished credit histories or low incomes have been battered. Weak home prices and rising interest rates have made it increasingly difficult for borrowers to keep up with their payments. Delinquencies and foreclosures in the subprime mortgage market are soaring.
"Although the turmoil in the subprime mortgage market has created financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear," Bernanke said.
The crumbling housing market has been a major factor behind the slowdown in the U.S. economy. Bernanke said the "near-term prospects for the housing market remain uncertain."
Even so, Bernanke stuck with the Federal Reserve's assessment that the economy is likely to grow at a moderate pace over the coming quarters. He also repeated the Fed's belief that inflation also should ease in the months ahead.
To be sure, Bernanke was careful to hedge the Fed's economic bets. The housing slump could turn out to be worse than expected, perhaps exacerbated by problems in the market for risky mortgages, he said. Recent weakness in business investment also could persist, he added. Those forces could further dampen economic growth.
On the other hand, consumers which proved "quite resilient" despite the housing slump and increases in energy prices, could continue to keep spending at a pace that would make the economy grow faster than currently expected, he said. And, there are other forces, including a still-good jobs market that is producing fatter paychecks, that could push up inflation.
The Fed chief's testimony comes amid fresh questions about the country's economic health, given problems with subprime mortgages, stock market turbulence and worries about the severity of the housing slump.
Against this backdrop, Sen. Charles Schumer, D-N.Y., chairman of the Joint Economic Committee, and some other lawmakers said the Fed should be open to cutting interest rates.
"Another reason to be open to an easing of monetary policy is the concern that the housing market adjustment is far from over," Schumer said. "Recent housing data has offered little encouragement that the market might be stabilizing. So it is still too early to tell if the worst is over for the housing market," he added.
There are some fears that consumers -- whose confidence is sagging -- and businesses could clamp down on spending and investing, thus short-circuiting overall economic growth. Rising prices for gasoline and other items also are raising concerns about inflation. These economic crosscurrents can complicate the Fed's job of trying to keep the economy and inflation on an even keel.
Just hours before Bernanke testified, the government reported that new orders for costly manufactured goods staged a modest rebound in February after a sharp slide the month before that jarred investors.
Last week Bernanke and his Fed colleagues decided to once again hold a key interest rate steady at 5.25 percent, which hasn't budged since August. They also gave themselves more leeway about future rate moves, raising the possibility that rates could go down. Previous policy statements had spoken only of the possibility of rate increases. The direction of rates, the Fed said, hinges on what incoming barometers say about the economy and inflation. Bernanke repeated that point on Wednesday.
Wall Street investors and some economists believe the Fed could start to cut rates this year to guard against any undue economic weakness. Other economists, however, believe rates probably will stay where they are throughout this year.