The Housing Chronicles Blog: Bernanke warns of a rocky road ahead

Wednesday, February 27, 2008

Bernanke warns of a rocky road ahead

The good news is that Fed Chief Bernanke seems to have awoken from his academic slumber and realized that the problems with the U.S. economy are much more serious than he was acknowledging (at least in public) a few months ago. The bad news is that the economic pain now seems to be impacting all corners of the country and in all businesses and no longer contained to the housing/mortgage/finance sectors. From an LA Times story by Peter Gosselin:

Federal Reserve Chairman Ben S. Bernanke told Congress today that nearly every corner of the U.S. economy was in danger of running into more trouble, suggesting that Americans were in for a period of tough economic sledding.

He signaled that the central bank was likely to cut interest rates further when it meets again next month.

Bernanke said the nation might also have to cope with more inflation, a sign that the economy could be caught in the crossfire of "stagflation," a troubling mix of faltering growth and rising prices...

The fact that the Fed chairman would be talking about still more rate cuts in the face of elevated inflation is a measure of just how deep a quagmire in which the economy has landed, with a slump in the housing market, recurring freeze-ups of the financial markets and slowdowns in consumer and business spending.

The Fed already has sliced its key interest rate 2 1/4 points to 3% in an effort to spur growth by pushing down the market-set rates for such things as mortgages, autos, credit card debt and business loans. But its efforts have been largely stymied by increasingly nervous lenders demanding higher, not lower, rates to lend, and in many cases refusing altogether to provide would-be borrowers with funds...

About the only bright spots that Bernanke managed to find were that manufacturers' inventory of unsold goods, which often rise in recessions, were within well within bounds, and that most companies outside of banking and finance remained in "good financial condition with strong profits, liquid balance sheets and corporate [borrowing] near historical lows."

"The economic situation has become distinctly less favorable" since last summer, Bernanke told lawmakers.

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