WASHINGTON: Federal Reserve chairman Ben Bernanke said Monday credit markets have improved since the August financial turmoil, but the US economic outlook is murky due to an exceptionally weak housing sector.
The US Federal ReserveBernanke told the New York Economic Club that he believes the US central bank's rate cut in September and other actions to improve liquidity have been effective in getting credit flowing after the near freeze-up in August.
"Conditions in financial markets have shown some improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time and we may see some setbacks," Bernanke said in remarks released by the Fed in Washington.
Bernanke said the housing market crisis that sparked the credit turmoil is not yet over, making it difficult to assess the overall economic picture.
Up to now, Bernanke said, the Fed has not seen evidence of "spillovers" of the housing market into the broader economy, but the crisis is still evolving.
"The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year," he said.
"However, it remains too early to assess the extent to which household and business spending will be affected by the weakness in housing and the tightening in credit conditions."
In view of the uncertainty, Bernanke said the Fed's decision to cut its federal funds rate by half a point to 4.75 per cent on September 18th was a form of insurance or "risk management" by the central bank.
"This action was intended to help offset the tightening of credit conditions resulting from the financial turmoil," he said.
"Risk management considerations also played a role in the decision, given the possibility that the housing correction and tighter credit could presage a broader weakening in economic conditions that would be difficult to arrest.
"By doing more sooner, policy might be able to forestall some parts of the potential adverse effects of the disruptions in financial markets."
Bernanke said US growth has maintained a "moderate" pace and is likely to show a similar trend in the third quarter despite softness in housing, which he said "subtracted about three-fourths of a percentage point from the average pace of US economic growth over the past year and a half."
He said the problems can bubble up as mortgage delinquencies rise in the face of higher rates from "resets" on adjustable-rate loans.
Because many sub prime mortgages are bundled into securities that are sold on financial markets, the housing problems spread to financial markets including short-term asset-backed "commercial paper" loans used by companies for day-to-day needs.
"But the developments in sub prime were perhaps more a trigger than a fundamental cause of the financial turmoil," he noted.
He said the Fed's actions "appear to have been helpful on the whole" but that mortgage markets remain "difficult" except in the loans for the highest quality borrowers.
Bernanke said that with the lessons learned from the crisis, "the financial system us likely to emerge from this episode healthier and more stable than before." - AFP/yb
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