Fed meets against worrisome backdrop
WASHINGTON – Fears gripping Wall Street in recent weeks – a worsening housing slump and painful credit crunch – are likely to figure prominently in discussions among Federal Reserve policymakers this week.
Fed Chairman Ben Bernanke and his central bank colleagues are to meet Tuesday to assess economic conditions. Concerns have grown among investors since the Fed’s last gathering in late June that problems in both the troubled housing and mortgage markets are spreading. And that could pose a threat to the national economy.
“The Fed’s list of worries got longer,” said Brian Bethune, economist at Global Insight. “We are seeing a continued unwinding of the housing sector and we’re getting tighter lending conditions.”
Increasingly restrictive lending conditions can put a damper on peoples’ ability to buy big-ticket items, such as homes, cars and appliances. And it can hinder businesses’ capital investment and hiring.
Dissecting the current situation that has led to turbulence on Wall Street in recent weeks, and charting out possible scenarios for the economy is something Bernanke and his colleagues will be focusing on during their closed-door deliberations Tuesday, analysts said.
Investors, however, overcame some of their anxiety Monday even as another company – American Home Mortgage Investment Corp. – filed for bankruptcy protection, the latest casualty of the distressed mortgage market. The Dow Jones industrials closed up 286.87 points, after taking a nosedive on Friday.
Economists believe Fed policymakers – in the brief statement released after the meeting – will acknowledge the difficulties associated with housing and tightening credit and seek to strike a reassuring tone that the economy will work its way through those challenges.
It’s a delicate dance. The Fed wants to send a comforting message that it is on top of things, but at the same time it doesn’t want to be viewed as being overly optimistic or pessimistic.
Against this backdrop, the Fed is widely expected to leave an important interest rate at 5.25 percent. In turn, commercial banks’ prime interest rate for certain credit cards, home equity lines of credit and other loans – would stay at 8.25 percent.
The central bank’s key rate hasn’t budged for more than a year. Before that, the Fed raised rates for two years to fend off inflation.
The Fed is expected on Tuesday to repeat its concern if inflation doesn’t recede as policymakers anticipate.
Core inflation – excluding food and energy prices – has moderated. These prices rose 1.9 percent over the 12 months ending in June, down from a 2 percent annual gain for May. Fed policymakers, however, say they want to see a string of steady improvements before they are willing to downgrade the risk of inflation.