Brian Vanderhoff's North Fulton Real Estate Blog

Federal Reserve Chairman Ben Bernanke warned Congress that the nation is in for a period of sluggish business growth and sent a fresh signal Wednesday that interest rates will again be lowered to steady the teetering economy.

"The economic situation has become distinctly less favorable" since the summer, the Fed chief told the House Financial Services Committee.

Since Bernanke's last such comprehensive assessment last summer, the housing slump has worsened, credit problems have intensified and the job market has deteriorated. Bernanke said that the confluence of these factors has turned people and businesses alike toward a more cautious attitude toward spending and investment. This, he said, has further weakened the economy.

Incoming barometers continue to "suggest sluggish economic activity in the near term," Bernanke told lawmakers. At the same time, he added, the Fed must keep a close eye on inflation given the recent run-up in energy and other prices paid by consumers and businesses.

Were energy prices to continue to rise at a sharp clip -- which the Fed doesn't anticipate -- it would "create a very difficult problem" for the economy. It would spread inflation and would put another damper on growth, Bernanke said. If that happened, he added, it would be a "very tough situation."

For now though, the No. 1 battle is shoring up the economy.

Bernanke pledged anew to slice a key interest rate to help the wobbly economy, which many fear is on the verge of a recession -- or possibly has already toppled into one.

The Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Bernanke said, hewing closely to assurances he offered earlier this month.

The central bank, which started lowering a key interest rate in September, has recently turned much more aggressive. Over the span of just eight days in January, it slashed rates by 1.25 percentage points -- the biggest one-month reduction in a quarter century. Economists and Wall Street investors predict the Fed will cut rates again at its next meeting on March 18.

There are dangers that the economy will weaken even further. "The risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further," Bernanke cautioned.

As Bernanke began his first day of back-to-back appearances on Capitol Hill to discuss the economy, there was more bad news on the housing and manufacturing fronts.

-- Sales of new homes fell in January for a third straight month, pushing activity down to the slowest pace in nearly 13 years, the Commerce Department reported. The median price of a new home dropped to the lowest level in more than three years.

-- And, orders to U.S. factories for big-ticket manufactured goods dropped in January by the largest amount in five months.

On Wall Street, stocks fluctuated at first, then moved higher after the release of Bernanke's prepared comments.

The Fed chief was hopeful that previous rate reductions along with a $168 billion stimulus package of tax rebates for people and tax breaks for business will energize the economy in the second half of this year.

Bernanke has come under some criticism for not acting sooner in cutting rates to respond to the economy's problems. However, Rep. Spencer Bachus, R-Ala., offered the Fed chief some sympathy. "There is perhaps no other public figure in American who has been subjected to as much Monday morning quarterbacking as you have over the past six months," Bachus said.

The panel's chairman, Rep. Barney Frank, D-Mass., suggested that the economy is not suffering through a garden-variety slowdown.

"I don't want to appeal to you to use the word recession, because I'm not going to be responsible for the nervous people at the stock market who overreact when you twitch your nose," Frank told Bernanke. "But the problems we now have are different."

Even as the Fed tries to shore up the economy, it must remain mindful of inflation pressures, Bernanke said.

Record high oil prices -- topping $100 a barrel -- are pushing consumer prices upward. That's shrinking paychecks, and with people feeling less well off because the values of their homes have dropped, consumer spending "slowed significantly" toward the end of the year, the Fed chief said.

The Fed forecasts that inflation will moderate this year compared with last year. But the Fed's recently revised inflation projection of an increase between 2.1 percent and 2.4 percent is higher than its old forecast from the fall.

Bernanke said there are "slightly greater upside risks" that inflation could turn out to be higher than the Fed currently anticipates, given the recent run-up in energy and food prices.

"Should high rates of overall inflation persist, the possibility also exists that inflation expectations could become less well anchored," Bernanke warned. If people, companies and investors think inflation will move higher, they will act in ways that could turn inflation even worse, a sort of self-fulfilling prophecy. And Bernanke said that could complicate the Fed's job of trying to nurture economic growth while also keeping inflation under control.

With the economy slowing and prices rising, fears are growing that the country could be headed for a bout of stagflation, a dangerous economic brew not seen since the 1970s.

The Fed for now is focused on bolstering the economy through interest rate reductions. To combat inflation, the Fed would raise rates.

At some point over the course of this year, the Fed will need to "assess whether the stance of monetary policy is properly calibrated" to foster the Fed's objectives of price stability "in an environment of downside risks to growth," Bernanke said.

With home foreclosures at record highs, the Fed has proposed rules to crack down on a range of shady lending practices that has burned many of the nation's riskiest "subprime" borrowers -- those with spotty credit or low incomes -- who have been hardest hit by the housing and credit debacles. The rules also would curtail misleading ads for many types of mortgages and bolster financial disclosures to borrowers.

The effectiveness of the regulations will depend on strong enforcement, Bernanke said. To that end, the Fed is working with other federal and state regulators.

Bernanke said consumers need to be financially savvy -- understanding mortgages, credit cards and other financial products.

"Well they certainly need to know the interest rate and how it varies over time and what that means to them in terms of payments," Bernanke said.

Labels: Fed Chairman, Federal Reserve, Feds, Rate Cut, Rates

The Federal Reserve on Wednesday cut a key interest rate for the second time in just over a week, reducing the federal funds rate by a half point. It signaled that further rate cuts were possible.

The Fed action pushed the funds rate to 3 percent. It followed a three-fourths of a percentage point cut on Jan. 22, a day after financial markets around the world had plummeted on fears that the U.S. economy was heading into a recession. That decrease had been the biggest one-day move in more than two decades.

The half-point cut Wednesday followed news that the economy had slowed significantly in the final three months of last year with the gross domestic product expanding at a barely discernible pace of 0.6 percent, less than half what had been expected. The report came amid increased concern from several quarters about a possible recession.

In a brief statement explaining their decision, Federal Reserve Chairman Ben Bernanke and his colleagues said that "financial markets remain under considerable stress."

The Fed move was approved on a 9 to 1 vote. Richard Fisher, president of the Fed's Dallas regional bank, dissented, preferring no change in rates.

The rate cut marked the fifth time that the Fed has cut the funds rate since it started with a half-point cut on Sept. 18 in response to the severe credit crisis which hit global markets in August.

The latest Fed action was expected to be quickly followed by cuts in banks' prime lending rate, the benchmark rate for millions of consumer and business loans. The Fed's hope is that by making credit cheaper, it will encourage more borrowing, giving the economy a needed boost.

The Fed's half-point move met expectations of financial markets and was a bolder move than the smaller quarter-point cut that many economists had been expecting.

In its statement, the Fed said that "downside risks to growth remain" and pledged to "act in a timely manner as needed to address those risks." That was seen as a pledge to cut rates further if the economy continues to weaken.

On inflation, the Fed officials said that they expected inflationary pressures to moderate in coming quarters but they also pledged to monitor price developments closely.

The GDP report showed that a key gauge of core inflation, which excludes energy and food, jumped at an annual rate of 2.7 percent in the final three months of last year, the fastest increase in a year and up sharply from a 2 percent increase in the July-September quarter.

The economy has been dealt a series of blows from a two-year slump in housing to a severe credit squeeze as banks faced with billions of dollars in losses from mortgage defaults have cut back on their lending and tightened standards.

The GDP report showed that the housing collapse had depressed economic growth last year by the largest amount in a quarter-century. Policymakers are worried that the slump could intensify this year as millions of subprime mortgages rest at higher rates.

To combat the threat of a recession in an election year, the Bush administration has been negotiating with congressional leaders for an economic stimulus package of around $150 billion, focused on tax rebates for households and business tax breaks to spur investment. The House passed its version of the proposal on Tuesday but Senate action could be delayed by efforts to expand the relief to senior citizens and the unemployed.

The Fed move Wednesday occurred at the first regularly scheduled meeting of 2008 for the Federal Open Market Committee, the group of Fed governors in Washington and regional Fed bank presidents who set interest rates.

The Fed's three-quarter-point cut on Jan. 22 was taken after an emergency video conference held by Bernanke and other members of the FOMC.

That rate cut, the biggest reduction in the funds rate in more than two decades, was seen as an effort to boldly demonstrate that the central bank was prepared to do whatever necessary to keep the country from slipping into a recession -- or at least make the downturn milder than it would have been otherwise.

Financial markets had complained that once the credit crisis hit in August, the Bernanke-led Fed had been too tentative in its responses until last week's move.

Many private economists believe the central bank will keep cutting rates through the spring, especially if the unemployment rate keeps rising. The jobless rate jumped from 4.7 percent to 5 percent in December, the biggest one-month increase in five years.

Labels: Fed Chairman, Feds, Key Rates, Mortgage Rates, Rates

WASHINGTON -- Federal Reserve Chairman Ben Bernanke said Thursday that a host of economic problems, including the severe housing slump, will cause business growth to slow noticeably in coming months.

Bernanke told Congress' Joint Economic Committee that the central bank is watching developments closely, but gave no signal that it's prepared at the current time to cut interest rates even further.

He stressed that the central bank was keeping all options open, saying the Fed would be closely watching economic growth and the threat of inflation.

If the economy slows to a crawl, the Fed cuts rates to boost activity while if inflation becomes a threat, it raises interest rates to dampen price pressures.

Going forward, Bernanke said the Fed would not be "dogmatic" in what it might do.

"We will try to make judgments over time as we get more information," Bernanke said, adding at another point that there were a "lot of uncertainties" at present.

A day after a huge selloff, stocks fluctuated on Thursday with the Dow Jones industrial average swinging between positive and negative territory.

Fed policymakers last week cut a key interest rate for the second time in two months, but disappointed Wall Street by discouraging expectations that it would follow with further rate cuts.

Bernanke said he and his colleagues believe economic activity will "slow noticeably in the fourth quarter" compared to the 3.9 percent pace of the third quarter.

"Growth was seen as remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction begin to wane," Bernanke told the JEC.

Many economists believe the economy's maximum point of danger of falling into a recession will occur in the early part of next year.

A variety of problems from the steepest housing downturn in more than two decades to a severe credit crunch, surging oil prices and a falling dollar have roiled Wall Street in recent days, triggering big plunges in stock prices.

The Dow Jones industrial average plunged by 360.92 points on Wednesday, the second drop of that magnitude in the past week.

Much of that anxiety stems from a steady stream of bad company news as corporate giants such as General Motors, Merrill Lynch and Citigroup have reported huge losses.

Bernanke acknowledged the recent market turmoil, but he generally took a more upbeat view of things, saying the Fed believes the economy should rebound from the current problems by the second half of next year.

He also repeated worries the Fed expressed last week: recent increases in oil and other commodities could raise the threat of inflation.

The Fed last week said the threats from weak growth and higher inflation seemed roughly in balance. Such a view, which Bernanke repeated on Thursday, will likely mean that the central bank plans no further interest rate cuts.

"All told, it was the judgment of (Fed policymakers) that, after its action on Oct. 31, the stance of monetary policy roughly balanced the upside risks to inflation and the downside risk to growth," Bernanke said.

However, members of the congressional panel said they believed a much more aggressive response was needed.

"I think we are at a moment of economic crisis," Sen. Charles Schumer, D-N.Y., told Bernanke. "I am not surprised to hear experts such as your predecessor, Alan Greenspan, warn about the threat of a recession. I have begun to worry about it to."

The steep slump in housing has been worsened by rising numbers of mortgage foreclosures as borrowers are unable to meet higher payments as their initial low "teaser" rates reset.

Bernanke said that on average about 450,000 subprime mortgages will reset to higher rates each quarter through the end of next year.

Bernanke said the number of foreclosures that will result from these resets can be reduced if financial institutions work with borrowers. The Bush administration and federal banking regulators have stepped up pressure on loan servicers in recent weeks to be more aggressive in offering loan work-outs to borrowers in trouble.

Bernanke said the Fed plans to issue a proposal by the end of the year that would create new standards and rules for all lenders that issue subprime loans, mortgages offered to borrowers with weak credit histories.

Labels: Ben Bernanke, Congress, Economic Problems, Fed Chairman, Inflation