The Housing Chronicles Blog: Benanke warns of greater economic pain to come

Tuesday, October 7, 2008

Benanke warns of greater economic pain to come

Fed Chairman "Ray of Sunshine" Ben Bernanke warns that the current economic crisis will likely extend the downturn and make it more painful. At least he's being realistic! From an AP story:

Federal Reserve Chairman Ben Bernanke warned Tuesday that the financial crisis has not only darkened the country's current economic performance but also could prolong the pain.

The Fed chief's more gloomy assessment appeared to open the door wider to an interest rate cut on or before Oct. 28-29, the central bank's next meeting, to brace the wobbly economy...

All told, economic activity is likely to be "subdued" during the remainder of this year and into next year, Bernanke said. "The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth," he warned.

Consumers - major shapers of economic activity - have buckled under the weight of rising joblessness, shrinking paychecks, hard-to-get credit, declining net wealth and tanking home and stock values. All the strains are "now showing through more clearly to consumer spending," Bernanke said.

Inflation numbers are "very ugly right now," Bernanke acknowledged. Even so, he believed slowing growth in the United States and overseas will continue to damp prices for energy, food and other commodities, meaning a better inflation outlook ahead. Inflation will moderate "pretty significantly" over the next few quarters, he predicted...

Employers cut jobs in September at the fastest pace in more than five years, the government reported last week. Payrolls were slashed by 159,000 last month alone. It was the ninth straight month of job losses. A staggering 760,000 jobs have disappeared so far this year.

The financial and credit crises, which took a turn for the worst in September and continue to stubbornly persist, are likely to "increase the restraint on economic activity in the period ahead," Bernanke said.

Even households with good credit histories are now facing difficulties obtaining mortgages or home equity lines of credit, he noted. Banks are also reducing credit card limits and denial rates on auto loan applications are rising, he said.

Banks, too, are feeling the strain of a lockup in lending, particularly in the market for commercial paper.

To that end, the Fed on Tuesday announced a radical plan to buy massive amounts of this short-term debt in an effort to break through a credit clog that is imperiling the economy.

1 comment:

Credit Crunch Investor said...

A clear sign of the spreading pain is way Arnie has been forced ask for a bail-out for California.