Federal Reserve & Interest Rates

Federal Reserve Chairman Ben S. Bernanke gave a speech Monday evening on the effects of financial turmoil on the economy and policy.

“Overall, U.S. economic performance so far this year has been reasonably good. The rate of economic expansion slowed somewhat in late 2006 and early 2007, but growth in the second quarter was solid and some of that momentum appears to have carried over into the third quarter.”

We are currently doing well, according to Bernanke. We have had some recent troubles in which the Fed responded to promptly. Bernanke did mention that it is the job of the Federal Reserve to prevent financial crisis. He stated, “Indeed, a principal motivation for the founding of the Federal Reserve nearly a century ago was the expectation that it would reduce the incidence of financial crises by providing liquidity as needed.”

The chairman once again stood by the recent decisions of the Fed to cut rates. “The Federal Reserve’s efforts to provide liquidity appear to have been helpful on the whole…Fortunately, the financial system entered the episode of the past few months with strong capital positions and a robust infrastructure. The banking system is healthy.”

There are still challenges with inflation, and a great possibility of the housing market continuing the hold back some economic growth. “The decline in residential investment directly subtracted about 3/4 percentage point from the average pace of U.S. economic growth over the past year and a half.” Chairman Bernanke still remains positive about the overall economy. Things do not look good for the housing market, however. The chairman said, “The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year. However, it remains too early to assess the extent to which household and business spending will be affected by the weakness in housing and the tightening in credit conditions.”

U.S. Treasury Secretary Henry M. Paulson, Jr., expressed similar concerns for families that will undergo strain due to the conditions of the housing market. Paulson plans to be more active in the mortgage lending sector, and watching things much more closely in the near future.
Market conditions slipped very slightly this week. Things will probably stabilize for now, however.

As for the Chairman, rate cuts do not seem a likely event in the next FOMC meeting. “For now, the Federal Reserve will continue to watch the situation closely and will act as needed to support efficient market functioning and to foster sustainable economic growth and price stability.” Unless there is a crisis over the next two weeks, the rates will probably remain as they are.