Fed sees credit crunch hurting housing market

WASHINGTON — A painful credit crunch is taking its worst toll on the already ailing housing market, while its impact on the rest of the national economy at least so far seems limited, the Federal Reserve reported Wednesday.

The Fed’s survey of business conditions around the country was anxiously awaited by Wall Street and Main Street for further clues about what the central bank will do with interest rates on Sept. 18, its next regularly scheduled meeting. A growing number of economists believe the Fed will lower a key interest rate now at 5.25 percent by at least one-quarter percentage point at that time to protect the economy from any ill effects of the credit crisis. The Fed hasn’t lowered this rate in four years.

“Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited,” according to the Fed’s report.

Credit problems — which started out with “subprime” mortgages held by people with spotty credit histories or low incomes — have spread to some more creditworthy borrowers. These problems intensified in August, unnerving Wall Street and investors around the globe. To stabilize the situation, the Fed has pumped tens of billions of dollars into the financial system and has sliced an interest rate it charges banks for loans.

Fed Chairman Ben Bernanke, in a speech last Friday, pledged the central bank would “act as needed” to limit any fallout on the economy from the credit crunch. He made clear, though, that the Fed’s decision would be driven by what is best for the economy. The Fed would not bail out investors and lenders “from the consequences of their financial decisions,” he said.

In Wednesday’s survey, the Fed said most banks reported that the recent developments in financial markets had led to more restrictive lending standards for people wanting to obtain home mortgages. That “was having a noticeable effect on housing activity,” the Fed said. “The reduction in credit availability added to uncertainty about when the housing market might turn around,” according to the report.

The Fed said that several banks noted that commercial real estate markets had also experienced “somewhat tighter credit conditions.”

However, a number of banks said “credit availability and credit quality remained good for most consumer and business borrowers.”