Fed looks at rate cuts

Washington Post:

The chairman of the Federal Reserve said last night that the central bank would take into account recent deterioration in the financial markets as it decides whether to cut interest rates next month.

Hours earlier, the White House released its economic forecast that acknowledged housing would be a drain on the economy next year, but it said tightening credit conditions would not stall business expansion.

The separate developments show how the Fed and the administration are grappling with a deterioration in the housing and credit markets as they set a course for the nation's economic policy. This month, new strains on global markets for debt have emerged, leading many economists to think there is greater risk of a recession.

Ben S. Bernanke, the chairman of the Fed, laid out in a speech to the Charlotte Chamber of Commerce how he is thinking through the economic situation as the central bank's policymaking committee prepares to meet Dec. 11. He noted that, by many measures, the labor market is doing well, with job growth and wages both on the rise.

But he said household spending appears to be softening, and that "the combination of higher gas prices, the weak housing market, tighter credit conditions and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead."

Bernanke said that the central bank was monitoring inflation closely, but he notably did not repeat language describing the risks of inflation and slower growth as "roughly balanced." Rather, he indicated that worsening conditions in the markets for many kinds of debt could slow the economy.

...

The bad loans made to borrowers who could not pay over the long term have already caused borrowers to tighten credit standards, but the ripple effect of bad loans has resulted in losses by lenders that has effected the supply of money they have to lend. Democrats have shown a remarkable ignorance of this problem by focusing their ire on "predatory" lenders. They overlook the fact that the people who may be losing the house they bought which they can no longer afford are not the biggest losers. A so called predatory lender loses far more when the asset he loaned money on is not worth what he is owed. That is why all those financial companies are having to write off billions and why the have billions less to lend to even good borrowers with sound assets.

Lower the discount rate and increasing the money supply is one way to deal with this problem. While there are inflationary pressures from energy cost caused by Democrats restriction of the energy supply, there is deflation in the housing market where prices have fallen. That is probably what the chairman meant when he talked about a "rough balance."