Aug 31, 2007 10:00 am US/Eastern
Fed Will Act 'As Needed' To Stem Credit Crisis
JACKSON, Wyo. (CBS) ―
Federal Reserve Chairman Ben Bernanke pledged Friday that the central bank will "act as needed" to keep the credit crisis that has unhinged Wall Street from hurting the national economy.
In anxiously awaited remarks, Bernanke didn't specify what the Fed's next move will be but made clear policymakers are keeping close tabs on the problem, which has roiled investors in the United States and around the globe.
Even as Bernanke vowed Fed action, he sought to temper investors' expectations.
"It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions," Bernanke said. "But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy."
President Bush, meanwhile, said the economy was strong enough to deal with turbulence in the stock markets.
Bush, speaking in the Rose Garden, said he was briefed on the situation in financial markets by Treasury Secretary Henry Paulson.
"The markets are in a period of transition as participants reassess and reprice risk," the president said. "This process has been unfolding for some time and it's going to take more time to fully play out. As it does, America's overall economy will remain strong enough to weather any turbulence."
The Fed's most important interest rate, called the federal funds rate, has been at 5.25 percent for more than a year. Any reduction to this rate would mean lower interest rates for millions of people and businesses. That's why it is the Fed's main tool for influencing economic activity.
In Bernanke's remarks to a high-profile conference here on housing sponsored by the Federal Reserve Bank of Kansas City, the chairman discussed some of the steps the Fed has taken so far to deal with the credit crunch.
While problems were triggered largely by heightened concerns about higher-risk "subprime" mortgages made to people with blemished credit histories or low incomes, Bernanke said "global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans."
To stabilize wobbly markets, the Fed on Aug. 17 sliced its lending rate to banks by a half percentage point to 5.75 percent. It also has pumped billions of dollars into the financial system to help banks and other institutions get through the credit hump and carry out their business.
The Fed's main concern, however, is the extent to which these problems might short-circuit economic growth.
"The further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected, with possible adverse effect on consumer spending and the economy more generally," Bernanke said.
The fear is that if credit continues to become harder for people and businesses to get, spending and investment will be crimped. That could hurt overall economic growth. In a worst-case scenario, the country could slide into a recession. Credit is the economy's life blood. It allows people to finance big-ticket purchases such as homes and cars and can help businesses bankroll expansions and other things that can boost hiring.
After a five-year boom, the housing market went bust last year; problems are expected to persist well into next year as builders try to whittle down a glut of unsold homes.
During the housing slump, a combination of higher interest rates and weaker home values clobbered homeowners, especially those with blemished credit histories or low incomes holding higher-risk "subprime" loans.
With squeezed homeowners finding it impossible to make their mortgage payments or pay them in a timely fashion, foreclosures and delinquencies are soaring and are expected to get worse. Lenders have been forced out of business, and hedge funds and other big investors in subprime mortgage securities also have taken a big financial hit.
Very low initial "teaser" rates jumping to much higher rates as they reset are socking some homeowners. Analysts estimate 2 million adjustable-rate mortgages will reset this year and next. Steep prepayment penalties have made it difficult for some to get out of their mortgages. Some overstretched homeowners can't afford to refinance or even sell their homes.
Most of the carnage has been in the subprime market, but problems have spread to other more creditworthy borrowers. That has sent investors into periods of panic in recent weeks, causing stocks on Wall Street to careen wildly.
(© 2007 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)
