Washington – Fears gripping Wall Street in recent weeks – a worsening housing slump and a 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 today behind closed doors to assess economic conditions. Concerns have grown especially 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 risk to the broader financial system and 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.
“I think that is going to provoke a lot of discussion about what is happening in the mortgage markets and the overall availability of credit.”
The free flow of credit is important to smooth functioning of the national economy. 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 crimp businesses’ capital investment and hiring. That reduced appetite by businesses and consumers would slow overall economic activity.
Investors 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 will seek to strike a reassuring tone that the resilient economy will work its way safely 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 today. 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.
