Federal Reserve Not Optimistic
November 12, 2007
Ben Bernanke, Federal Reserve Chairman, reported on Thursday, 8 November, that a whole array of economic issues and problems, including woes with the housing market, would most likely cause economic growth in the US to slow down in the near future.
He reported to Congress’ Joint Economic Committee that the central bank is monitoring current developments closely, but he made no suggestion that the Fed is ready to cut interest rates even further than what it has done.
During the questioning, Bernanke made it clear that the Federal Reserve would keep all of its options open and that it would be watching closely the economic problems the nation is facing.
In general, and in simple terms, if the US economy begins to slow, the Federal Reserve reduces interest rates in order to jumpstart business activity. If inflation becomes a significant threat to the overall economy, the Fed will raise rates to slow down price pressures.
Much of the current problem stems from the massive slump in the housing market which has only grown worse as rising numbers of mortgage foreclosures become reality. Much of this was caused by resets in the adjustable rate mortgages that were processed only a few years ago. When rates reset to much higher levels, homeowners often cannot make their payments.
The Chairman reported that some 450,000 sub-prime mortgages will reset to higher rates each quarter and that this rate will continue through the end of next year.
He also suggested that this huge number of foreclosures can be reduced if financial lending institutions work with borrowers who are in trouble.
In addition, he also made remarks detailing a new plan. He said that the Federal Reserve plans to submit a proposal that would issue new guidance standards and rules for all lenders who handle sub-prime mortgage loans