Wed, Jul 16 2008, 08:18 GMT
by BBVA Bancomer Team
Bernanke testified before Congress amid growing concerns about the financial condition of the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. Bernanke assured Congress that the Federal Reserve is aware of the importance of these firms to the mortgage market, reason why the Board authorized the Federal Reserve Bank of New York to lend to Fannie Mae and Freddie Mac, should that become necessary. Bernanke highlighted that Fed assistance would be temporary and only a “bridge” to the time when Congress decides how to proceed.
Bernanke indirectly supported Congress proposal to help households facing foreclosure –which could be sent to President Bush next week- by explicitly describing the vicious cycle between foreclosures and falling home prices.
Regarding the long term outlook, Bernanke stated that most FOMC participants expected that, over the remainder of this year, output would expand at a pace appreciably below its trend rate, primarily because of continued weakness in housing markets, elevated energy prices, and tight credit conditions. He added that growth is projected to pick up gradually over the next two years as residential construction bottoms out and begins a slow recovery, and as credit conditions gradually improve. However, he warned that there was a high degree of uncertainty to this outlook and that risks were skewed to the downside.
On the outlook for inflation he was equally negative. He reiterated that the elevated level of overall consumer inflation largely reflects a continued sharp run-up in the prices of many commodities –especially oil. He dismissed the claim that high oil prices may be due solely to speculation, and seemed to defend the thesis of structural “long term” trends of rising demand and decelerating supply.
He concluded by saying that, given the high degree of uncertainty, the Board will need to carefully assess incoming information bearing on the outlook for both inflation and growth. In light of the increase in upside inflation risk, the Board will be particularly alert to any indication of inflationary pass-through from high oil prices and dollar depreciation into long-term inflation expectations and price and wage setting processes. On the other hand, tighter credit conditions and a still-deeper contraction in housing markets still pose significant downside risks to growth. Therefore, we expect Fed funds to remain stable at 2% in the near future.
Published on Wed, Jul 16 2008, 08:21 GMT
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