Bernanke: Fed ready to act aggressively
January 10, 2008 1:21 PM ET
WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke said on Thursday the U.S. economy's prospects were worsening because of a weak housing sector and credit market turmoil and said the central bank was ready to act aggressively to bolster it.
"In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary," Bernanke said in remarks to a housing and finance group.
"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," he said.
Analysts welcomed Bernanke's forthright acknowledgment of the dangers faced by the economy, which many fear could fall into recession.
"I think he's come to terms with the fact that while inflation may be a concern down the road, he has to take care of the train that's coming at him right now, which is the fear of a recession," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore.
Bernanke cited several factors including higher oil prices as well as lower stock prices and falling home values that he said was bound to hurt consumer spending this year.
"Incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced," Bernanke said.
U.S. stock markets surged after Bernanke's comments, while the dollar remained weaker against a basket of currencies as investors concluded that the Fed would aggressively lower interest rates at its end-of-month policy-setting meeting.
The Fed's policy-setting Federal Open Market Committee holds a two-day meeting January 29-30. Bernanke's comments reinforced market expectations that it will cut interest rates a half percentage point.
He said last Friday's employment report, which showed only 18,000 jobs were created in December, was a clear sign of mounting economic risks. "Should the labor market deteriorate, the risks to consumer spending would rise," Bernanke said.
(Additional reporting by Emily Kaiser in Washington and Caroline Valetkevitch in New York, Editing by Andrea Ricci)
Copyright 2008 Reuters
My Commentary:
For those people who are thinking of purchasing their first home or those desperate to refinance out of an adjustable rate mortgage, interest rates are likely to improve. Recent development since the release of this article (see above) strongly suggests that the Fed’s will lower interest rates by 50 basis points later this month. Currently, the prime rate (Wall Street Journal) is at 7.25%, which would decrease to 6.75% if implemented this month.
It is important for me to point out that with lower interest rates on the rise, borrowers may still find it difficult for loan approvals. Fannie Mae/Freddie Mac has tightened up the guidelines over the last several months due to an increase of foreclosures/short sales.
A person looking for loan options can expect a bank/lender to determine interest rates and approval mostly on credit scores and monthly debt income. If your average credit score is 620 to 680, you are likely to have a higher interest rate on a conforming conventional loan. However, the expected rate reduction would still look attractive for anyone who is in that situation.
The good news is that government sponsored loans (non-conventional) such as FHA are starting to be more recognizable to the public. The FHA loan offers excellent interest rates and terms to those who may not have the best or lack of credit profile. The FHA loans limits are expected to increase to the maximum conforming loan amount, which is $417,000.00.
The bottom line is that Mr. Bernanke must continue to act aggressively with the real estate industry to prevent a potential danger of a recession. We must continue to be positive in 2008 and be smart with our decisions whether it is in real estate, retirement, or monthly spending.
Aaron S Brown Loan Advisor - Flagstar Bank Aaron.S.Brown@flagstar.com
888-760-8383 Ext: 130
