Federal Reserve Chairman Ben Bernanke says that while the most recent data suggest a “resilient” U.S. economy, growth should slow “noticeably” this quarter and into 2008 as the housing slump intensifies.
Still, the economy should strengthen later next year, Bernanke told the U.S. Joint Economic Committee of Congress today.
He said the Fed’s recent rate reductions have put risks to growth and inflation roughly in balance.
Bernanke’s remarks suggest that another rate reduction in December is unlikely. But t he left the door open for future moves, saying the Fed will “act as needed” to foster sustained economic growth and low inflation.
Since the last Federal Open Market Committee meeting, at which officials lowered the federal funds rate by a quarter percentage point to 4.5%, “the few data releases that have become available have continued to suggest that the overall economy remained resilient in recent months,” Bernanke sai.
“However, financial market volatility and strains have persisted,” he said, and investor concerns about housing and its implications on the broader economy have “intensified.”
Bernanke said he also sees “important” upside inflation risks, citing higher oil and commodity prices and the dollar, which has “weakened.”
Still, the Fed expects both overall and core inflation — which excludes food and energy — to stay in a “range consistent with price stability next year,” Bernanke said, as inflation expectations have stayed “reasonably” anchored. But that could change, he cautioned, should those price expectations “become unmoored.”
As for the U.S. housing market, Bernanke predicted that foreclosure rates would continue to rise and painted a grim picture of what such a development could have on the broader economy.
Bernanke said subprime adjustable-rate mortgages posed the biggest threat, as it will be “much more difficult” than before for homeowners with these loans to afford the increased monthly payments.
“Delinquencies on these mortgages are likely to rise further in coming quarters as a sizable number of recent-vintage subprime loans experience their first interest rate resets,” he said.
Bernanke said the number of foreclosures could be reduced if “financial institutions work with borrowers.”