WASHINGTON : The US Federal Reserve moved to cut rates and add liquidity to the financial system in recent weeks in the face of "significant market stress," Federal Reserve Chairman, Mr Bernanke told Congress on Thursday. Bernanke said the economy and markets reacted to surprisingly large losses in the area of sub-prime mortgages that "have far exceeded even the most pessimistic estimates."
Appearing before the House of Representatives' Committee on Financial Services, Bernanke said the worst of the mortgage maelstrom is not yet over, as more homeowners face difficulties making payments on adjustable rate mortgages (ARMs).
"With house prices still soft and many borrowers of recent-vintage sub-prime ARMs still facing their first interest-rate resets, delinquencies and foreclosure initiations in this class of mortgages are likely to rise further," he said.
Bernanke said about 15 percent of ARMs to sub-prime lenders with weak credit were in delinquency or foreclosure in July, and that about 320,000 foreclosures were initiated in each of the first two quarters of the year, up from a previous average of 225,000.
"It is difficult to be precise about the number of foreclosure initiations ... Historically, about half of homeowners who get a foreclosure notice are ultimately displaced from their homes, but that ratio may turn out to be higher in coming quarters because the proportion of sub-prime borrowers, who have weaker financial conditions than prime borrowers, is higher."
Bernanke spoke two days after the Fed cut its base federal funds rate by half a point to 4.75 percent "to help forestall some of the adverse effects on the broader economy that might arise from the disruptions in financial markets."
The Fed also cut its discount rate for direct loans from the central bank by 50 basis points, after reducing that rate by the same amount in August in an effort to ease access to credit for lenders amid tighter conditions.
Bernanke said that the wide losses prompted a retrenchment by lenders, affecting the broader financial system.
"In this episode, the shift in risk attitudes combined with greater credit risk and uncertainty about how to value those risks has created significant market stress," he said.
"On the positive side of the ledger, past efforts to strengthen capital positions and financial market infrastructure places the global financial system in a relatively strong position to work through this process."
Meanwhile, Treasury Secretary Henry Paulson told the same hearing the US and global economies are strong enough to weather the crisis stemming from sub-prime loan failures with only a "modest" penalty.
"US economic fundamentals are healthy: unemployment is low, wages are rising and core inflation is contained," Paulson said.
"Although the recent reappraisal of risk, coupled with weakness in the housing sector, may well result in a penalty, the fundamentals point to continued US economic growth."
Paulson has said previously that the August credit turmoil would act as a penalty on growth, but that the US is not headed toward recession.
"The global economy also remains strong, with annual growth at around five percent and with many emerging market economies growing even more rapidly than the global average," he said.
President George W. Bush said separately he was "optimistic" about the prospects for the US economy, despite acknowledging "unsettling" times in the housing market.
"I'm optimistic about our economy," Bush said when asked in a White House news conference about predictions from some analysts for a recession.
But he added: "There is no question" that Americans were experiencing "unsettling times in the housing market." - AFP/de
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