Bush, Fed credit moves may ‘derail’ economic expansion

WASHINGTON: US Federal Reserve chairman Ben Bernanke has pledged to act to limit the spillover of a credit crunch on the broader economy, as the White House unveiled aid to homeowners facing foreclosure.The two separate announcements on Friday were aimed at curbing contagion from a housing crisis that some fear could derail the US economic expansion by causing credit markets to freeze up further.In his morning radio address yesterday, President George W Bush described the turmoil as the mortgage industry “going through a period of adjustment,” and said he had “made it a priority to help American homeowners navigate these financial challenges.”Bernanke, in his first public remarks since global markets were roiled by fears of a liquidity crisis, said the Fed wanted to avoid “further tightening of credit conditions,” which could have “adverse effects on consumer spending and the economy more generally.”“The (Fed) continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets,” Bernanke added.Markets viewed the remarks as opening the door to a potential interest rate cut that could lower overall borrowing costs and stimulate credit markets.Stephen Gallagher, economist at Societe Generale in New York, said the Fed “continues to embrace the market with tough love, but will do what is necessary,” including a cut in the federal funds rate if necessary, on September 18.Some analysts argue that Bernanke does not want to be too quick to cut rates, for fears of sparking inflation and being seen as bailing out investors who made risky bets.But Robert DiClemente, economist at Citigroup, said he believes that “the speed and magnitude by which the overall financial setting has deteriorated are consistent with downside risks ... that justify policy (rate) action.”Meanwhile, Bush outlined a series of actions aimed at averting foreclosure for distressed homeowners, many of whom are facing a crisis as adjustable-rate mortgages are reset to reflect higher rates.One measure he announced would allow homeowners with a good credit history but who cannot afford their current payments to refinance into federally insured mortgages, likely at lower rates.He also encouraged lenders to try to work out payment arrangements with financially strapped homeowners and urged Congress to pass additional relief measures.Analysts said the measures would only affect a small fraction of the estimated 2mn homeowners facing foreclosure.Bush insisted the federal government has only a “limited” role to play in helping millions of people now struggling to hold onto their homes amid rising interest rates.The federal government, Bush said yesterday, “will not bail out lenders—because that would only make a recurrence of the problem more likely.“And it is not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could never afford.“But I support action at the federal level that will help more American families keep their homes.”Among other measures Bush called on Congress to change parts of the federal tax code “that will protect homeowners from having to pay taxes on cancelled mortgage debt.”Bernanke, speaking at a Fed symposium in Jackson Hole, Wyoming, did not directly speak about the next move on interest rates, but appeared to be aiming to allay concerns that the Fed would do nothing to prevent a broader credit crunch that drags down the economy.But DiClemente said Bernanke’s comments “reinforced expectations of an upcoming reduction in the funds target.”The bank has kept its main federal funds rate at 5.25% for over a year but on August 17 cut the discount rate for direct loans from central bank a half-point to 5.75% in an effort to promote credit flows.Bernanke said incoming reports suggest the world’s biggest economy “continued to expand at a moderate pace” but that the outlook has become somewhat murkier in view of the financial market turmoil of recent weeks.