Fed Chief, Bush Give Hope to Wall Street
Saturday, September 1, 2007
JACKSON, Wyo., Aug. 31 -- Federal Reserve Chairman Ben S. Bernanke said Friday that the central bank was willing to take action to ease damage to the economy from troubled financial markets, and President Bush introduced a plan to help people who are at risk of losing their homes to foreclosure.
The separate actions by the chief central banker and the president gave Wall Street faith that policymakers were confronting the problems in the home-mortgage market. Their actions drove the stock market up for the day and helped soften fears of a disastrous fallout from the wave of foreclosures expected in the next two years. All three major market indicators rose about 1 percent.
"Essentially, you have the executive branch saying they're going to do something. You have the Fed saying if the economy is in trouble, they're going to do something," said Mark A. Coffelt, chief investment officer of Empiric Funds. "The market's really saying, 'Someone's going to do something.' "
Investors had been hotly anticipating Bernanke's speech, his first since the meltdown in mortgage and other credit markets in August, hoping for clues to whether the Fed might be inclined to cut a key interest rate to stimulate the economy. The speech, delivered at the Federal Reserve Bank of Kansas City's annual economic symposium here, seemed to imply that the Fed was more open to cutting rates than it was when it made its last statement about the economy, two weeks ago.
"Developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy," Bernanke said. Moreover, he said, the Fed's policymaking committee "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."
The Federal Open Market Committee is scheduled to meet Sept. 18, and investors increasingly expect it to cut the benchmark federal funds rate after having left it at 5.25 percent for more than a year. Bernanke did not explicitly say what action he had in mind for that meeting, but in the subtle language of monetary policy, he didn't have to.
"It was a way to reassure the market," said Martin H. Barnes, who studies the Fed for investment analysis firm BCA Research and who attended the speech. "He did not do anything to dissuade the market from expecting a rate cut at next month's meeting."
To decide its course of action, Bernanke said, the Fed will "pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts around the country."
While Bernanke's speech addressed the implications of turmoil in the financial markets for the economy in the near term, the president, in Washington, proposed steps that might directly help homeowners whose mortgages are going to "reset" to sharply higher levels in the next two years, putting many of them at risk of foreclosure and of losing their homes.
The Bush administration previously avoided intervening in the problems that began in the market for subprime mortgages and have spread throughout world financial markets.
Appearing briefly in the Rose Garden with Housing and Urban Development Secretary Alphonso Jackson and Treasury Secretary Henry M. Paulson Jr., Bush noted that the housing-finance market has undergone "tremendous innovation" in recent years. That made mortgages more widely available, a mostly positive development that has helped push U.S. homeownership to new heights. But it came with a downside, the president said: "Unfortunately, there has also been some excesses in the lending industry."
The administration's plan, much of which would require congressional action, focuses heavily on making more borrowers eligible for mortgages insured by the Federal Housing Administration. The plan might help more homeowners who owe mortgage payments they cannot afford to refinance, enabling them to keep their homes.