Federal Reserve Chairman Ben Bernanke today spoke at the Economic Club of New York. The topic of his speech was the Outlook for the Economy and Policy.
While nothing groundbreaking was said, I do want to recap his comments and point out a few observations.
Bernanke opened with the usual mixed message, progress has been made but several considerable challenges lie ahead...
"financial conditions are considerably better than they were then, but significant economic challenges remain. The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible."
I don't like making Ben look like a politician, but at this point one of the biggest factors affecting his outlook and the market's perception of our economic well-being is: CONFIDENCE. This forces Ben to use his bully pulpit from time to time to remind the herd that he has everything under control. The crisis evolved partially due to a lack of confidence in the banking system, so now Ben must spend a considerable amount of time tip toeing around the CAUTIOUS side of his optimism. The need for Ben to be a cheerleader is noted on several instances within the speech. Specifically...
"I think it is fair to say that policymakers' forceful actions last fall, and others that followed, were instrumental in bringing our financial system and our economy back from the brink.
The stabilization of financial markets and the gradual restoration of confidence are in turn helping to provide a necessary foundation for economic recovery."
Bernanke then shared his personal opinion of the economic environment, which again is the same story we're used to hearing...cautiously optimistic.
My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely. However, some important headwinds--in particular, constrained bank lending and a weak job market--likely will prevent the expansion from being as robust as we would hope.
So, the obvious concerns are tight credit conditions and unemployment, both of which mortgage and housing professionals are extremely aware of already. That said, with DU 8.0 about to go live...mortgage credit is getting tighter, which he elaborated on...
Bernanke on Bank Lending and Credit Availability...
"borrowers with access to public equity and bond markets, including most large firms, now generally are able to obtain credit without great difficulty. Other borrowers, such as state and local governments, have experienced improvement in their credit access as well."
"However, access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses. Bank lending has contracted sharply this year, and the Federal Reserve's Senior Loan Officers Opinion Survey shows that banks continue to tighten the terms on which they extend credit for most kinds of loans--although recently the pace of tightening has slowed somewhat"
"The Federal Reserve will continue to work with banks to improve the access of creditworthy borrowers to the credit they need. Lending to creditworthy borrowers is good for the economy, but it also benefits banks by maintaining their profitable relationships with good customers. We continue to encourage banks to raise additional capital to support their lending. And we continue to facilitate securitization through our Term Asset-Backed Securities Loan Facility (TALF) and to support home lending through our purchases of mortgage-backed securities."
"changes to accounting rules at the beginning of next year will require banks to move a large volume of securitized assets back onto their balance sheets. Unfortunately, reduced bank lending may well slow the recovery by damping consumer spending, especially on durable goods, and by restricting the ability of some firms to finance their operations."
"Normalizing the flow of bank credit to good borrowers will continue to be a top priority for policymakers."
Bernanke on Commercial Real Estate...
"Demand for commercial property has dropped as the economy has weakened, leading to significant declines in property values, increased vacancy rates, and falling rents."
"Pressures may be particularly acute at smaller regional and community banks that entered the crisis with high concentrations of CRE loans. In response, banks have been reducing their exposure to these loans quite rapidly in recent months. Meanwhile, the market for securitizations backed by these loans remains all but closed."
"Recognizing the importance of this sector for the economic recovery, the Federal Reserve has extended the TALF programs for existing CMBS through March 2010 and newly structured CMBS through June. Moreover, the banking agencies recently encouraged banks to work with their creditworthy borrowers to restructure troubled CRE loans in a prudent manner, and reminded examiners that--absent other adverse factors--a loan should not be classified as impaired based solely on a decline in collateral value."
The Labor Market...
"Together with the reduction in hours worked, slower wage growth has led to stagnation in labor income. Weak income growth, should it persist, will restrain household spending."
"The best thing we can say about the labor market right now is that it may be getting worse more slowly."
"Given this weakness in the labor market, a natural question is whether we might be in for a so-called jobless recovery, in which output is growing but employment fails to increase."
"productivity growth has recently been quite high, even when the economy was contracting."
"Will the increases in productivity persist? It is likely that, in some cases, firms achieved their productivity gains by asking their remaining workers to provide extra effort. The additional gains that can be achieved in this way are limited and probably temporary."
"Because smaller businesses account for a significant portion of net employment gains during recoveries, limited credit could hinder job growth. Overall, a number of factors suggest that employment gains may be modest during the early stages of the expansion."
The Outlook for the Economy and Policy...
"Housing faces important problems, including continuing high foreclosure rates, but residential investment should become a small positive for growth next year rather than a significant drag, as has been the case for the past several years."
"The outlook for inflation is also subject to a number of crosscurrents. Many factors affect inflation, including slack in resource utilization, inflation expectations, exchange rates, and the prices of oil and other commodities."
"On net, notwithstanding significant crosscurrents, inflation seems likely to remain subdued for some time."
"We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability."
"Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability. "
At the end of his speech he reiterated that rates would remain near exceptionally low levels for "an extended period"
The Fed's concerns revolve around tight credit conditions and a lack of lending to businesses and households. Bernanke even tied these worries to the health of the labor market. We know that housing remains a mainstream issue, but there isnt much more Bernanke can to do support that market (extending the MBS purchase program is only thing left to do). Ben did touch on the value of the dollar, but he did so in context of the Fed's dual mandates of fostering price stability and full employment. Remember, US currency worries will be dealt with by the Treasury, not the Fed. Also in regards to bank lending, Bernanke commented on the upcoming changes in accounting rules. He was referring to FAS 166 and FAS 167. This topic was discussed on the Voice of Housing blog. READ MORE
All in all, today's speech provided nothing that might sway our sentiment that the Fed's interest policy will be changing in the near future.